<PAGE>
As filed with the Securities and Exchange Commission on May 2, 1997.
REGISTRATION NO. 333-21403
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
U.S. RESTAURANT PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 6798 75-2687420
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
5310 HARVEST HILL ROAD
SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
ROBERT J. STETSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5310 HARVEST HILL ROAD
SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(Address, including zip code, and telephone number, including
area code, of agent for service)
----------------------
Copies to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET
SUITE 5400
DALLAS, TEXAS 75270
(214) 745-5400
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE AND ALL OTHER
CONDITIONS DESCRIBED IN THE ENCLOSED PROXY STATEMENT/PROSPECTUS HAVE BEEN
SATISFIED OR WAIVED.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: [ ]
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
(CALCULATION TABLE CONTINUED ON NEXT PAGE)
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSES MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT PRICE(2) REGISTRATION FEE(3)
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<S> <C> <C> <C> <C>
Common Stock
$.01 par value ............ 8,063,640 Not Applicable $228,301,808 $69,182
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(1) Based upon the estimated maximum number of shares of common stock, $.01
par value per share, of the Registrant issuable to the holders of the units
of beneficial interest of U.S. Restaurant Properties Master L.P. (the
"Partnership") and the managing general partner of the Partnership in
connection with the Conversion, as described in the enclosed Proxy
Statement/Prospectus.
(2) Estimated pursuant to Rule 457(f) of the Securities Act of 1933, as
amended, based upon the average of the reported high and low sales prices
of a Unit on the New York Stock Exchange on April 23, 1997.
(3) $63,707 of such fee was previously paid in connection with the Registrant's
initial filing of this Registration Statement on February 7, 1997.
</TABLE>
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
FORM S-4
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
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LOCATION IN
FORM S-4 ITEM PROXY STATEMENT/PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus. . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus. . . . . . . . . . . . . . . . . . . . Available Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . . . . . Summary; Risk Factors
4. Terms of the Transaction. . . . . . . . . . . . . Summary; The Conversion; The Special Meeting;
Federal Income Tax Considerations
5. Pro Forma Financial Information . . . . . . . . . Summary; Selected Historical and Pro Forma
Financial Information and Other Data
6. Material Contacts with the Company Being
Acquired. . . . . . . . . . . . . . . . . . . . . Summary; The Company; Business
7. Additional Information Required for
Reoffering by Persons and Parties Deemed To
Be Underwriters . . . . . . . . . . . . . . . . . Not Applicable
8. Interests of Named Experts and Counsel. . . . . . Experts; Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. . Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants . . . Not Applicable
11. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . Not Applicable
12. Information with Respect to S-2 or S-3
Registrants . . . . . . . . . . . . . . . . . . . Not Applicable
13. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . . . . Not Applicable
<PAGE>
14. Information with Respect to Registrants Other . .
than S-2 or S-3 Registrants . . . . . . . . . . . Summary; The Company; Management's Discussion
and Analysis of Results of Operations and Financial
Condition; Business; Policies with Respect to Certain
Activities; Market Prices of Units and Distributions;
Capitalization; Management; Principal Stockholders;
Description of Capital Stock; Certain Provisions of
Maryland Law and of the REIT Corporation's Articles
and Bylaws; Comparative Rights of Unitholders and
Stockholders
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies . . . . Summary; The Company; Management's Discussion
and Analysis of Results of Operations and Financial
Condition; Business; Policies with Respect to Certain
Activities; Market Prices of Units and Distributions;
Capitalization; Management; Principal Stockholders;
Description of Capital Stock; Certain Provisions of
Maryland Law and of the REIT Corporation's Articles
and Bylaws; Comparative Rights of Unitholders and
Stockholders
16. Information with Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . . . . . Not Applicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies . . . . . . . . . . . . Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited. . . . . . . . Outside Front Cover Page; Summary;
The Special Meeting
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or in
an Exchange Offer . . . . . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
5310 HARVEST HILL ROAD, SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(800) 322-9827
Dear Limited Partner:
We are seeking your approval to convert U.S. Restaurant Properties Master
L.P. ("USRP") to a self-advised real estate investment trust ("REIT"). This
conversion will not change either the strategy of the company or the
"flow-through" tax advantages the company currently enjoys. The conversion
will be tax-free, and the shares of the company will continue to be traded on
the New York Stock Exchange ("NYSE") under our current trading symbol, "USV."
Your vote on this matter is important -- not voting effectively counts as a no
vote, so please send in your proxy.
WHY CONVERT TO THE REIT STRUCTURE? The answer is to enhance investor
value by employing a structure (I.E. a REIT as opposed to a master limited
partnership ("MLP")) that is more widely accepted and endorsed by investors,
particularly institutional investors. Currently, there are only four
NYSE-traded MLPs that invest in real estate, of which USRP is one. On the
other hand, there are approximately 150 NYSE-traded REITs, and a vast majority
of those are "self-advised." As a self-advised REIT, the company should enjoy
greater access to lower-cost debt financing, which should increase profits and
the cash available for dividends. Also, the company believes that it would
enjoy more participation from institutional investors, which should increase
the stock price relative to remaining an MLP. As the company continues to grow
and its financing requirements grow with it, we believe that self-advised REIT
status has become very important to our future.
WHAT IS A "SELF-ADVISED" REIT? In a self-advised REIT, the management is
employed by the REIT, rather than by an external advisor, such as the managing
general partner arrangement the company currently uses. To become self
advised, your managing general partner will convert its property management
contract and convert its aggregate 1.98% partnership interest in exchange for
REIT shares (or equivalent partnership interests), and then the management team
of your managing general partner will become employees of the REIT. In
exchange for the property management contract and 1.98% partnership interest,
the managing general partner will receive consideration (consisting of an
interest in U.S. Restaurant Properties Operating L.P., shares of REIT common
stock and/or units in USRP) equal in value to 850,000 REIT shares (the "Initial
Shares"), and will be eligible to receive additional shares in the year 2000 if
certain targets are reached (collectively, the "Acquisition Price"). Following
the receipt of the Initial Shares, all management fees will cease. Assuming
the continued growth of the company, the assignment and conversion will
increase the cash available for dividends to the stockholders, and will
increase net income above what it would otherwise have been.
Based on all acquisitions closed through April 30, 1997, by becoming a
self-advised REIT, the cash available for dividends per share will increase.
On a pro forma basis, giving effect to all acquisitions completed plus the
acquisition of the approximately $25 million of properties currently under
binding contract, the cash available for dividends per share would
<PAGE>
have been $2.67 in 1996 if USRP had been a self-advised REIT on the terms
described above and in the attached Proxy Statement/Prospectus, $.05 per
share more on a pro forma basis than in its present structure as an advised
entity. As a frame of reference, the cash available for distributions per
unit was $2.09 for the fiscal year ended December 31, 1996. In addition,
any property acquisitions in excess of the properties currently under contract
will add to the already accretive nature of the transaction. There can be no
assurance that all of such properties will be acquired or that additional
properties will be available at prices acceptable to the company. Additionally,
pro forma results are not necessary indicative of what the company's financial
position would had been had such transactions occurred on the assumed date.
The Acquisition Price was approved by a special committee of outside
directors of the managing general partner, and the special committee has
received a fairness opinion with respect to such exchange from the investment
banking firm Morgan Keegan & Company, Inc.
It has been just 24 months since the limited partners approved amendments
to the partnership agreements which enabled USRP to expand. Since that
approval, the price of the Units on the New York Stock Exchange has risen more
than 80%, and partnership dividends, net income and cash available for
distributions have all increased substantially. Your approval of the
conversion is important to take the company to its next stage of growth and
progress.
There are two alternative ways in which the REIT conversion can be
completed on a tax-free basis: the "merger alternative" and "the exchange
alternative" (see the attached Proxy Statement/Prospectus for a detailed
description of the alternatives). The merger alternative is the simpler
approach and is preferred by management, but to ensure that this approach is
tax-free we have asked the Internal Revenue Service to confirm its tax free
status. In the event that the IRS does not provide that confirmation, then the
exchange alternative must be used, and it will provide the same advantages of
REIT conversion. TO ENSURE THAT USRP CONVERTS TO A REIT, YOU MUST VOTE FOR
BOTH THE MERGER AND THE EXCHANGE ALTERNATIVES ON YOUR PROXY CARD.
We encourage you to read the Proxy Statement/Prospectus and then vote your
Units in favor of the conversion by filling out the enclosed proxy card and
returning it to D.F. King & Co. in the enclosed, self-addressed, stamped
envelope. Not voting is the same as voting against the conversion, so we urge
everyone to vote. If you have any questions, please call us toll free at
(800-322-9827). Thank you for your consideration of the conversion.
Best Regards,
Robert Stetson Fred Margolin
Chief Executive Officer Chairman of the Board
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
Notice Of A Special Meeting Of
The Limited Partners on June 24, 1997
To the Limited Partners of U.S. Restaurant Properties Master L.P.:
A special meeting (the "Special Meeting") of the limited partners (the
"Limited Partners") of U.S. Restaurant Properties Master L.P. ("USRP") will
be held at the offices of USRP, at 5310 Harvest Hill Road, Suite 270, Dallas,
Texas on June 24, 1997 at 10:00 a.m., or at any adjournment thereof, to consider
and vote upon two alternative proposals to implement the proposed conversion
(the "Conversion") of USRP into a real estate investment trust ("REIT").
The Conversion will be effected through one of two alternatives (i) the
Merger Alternative or (ii) the Exchange Alternative. The Merger Alternative
would be effected through a tax-free merger (the "Merger") of USRP
Acquisition, L.P., a Delaware limited partnership that is an indirectly
wholly-owned subsidiary of U.S. Restaurant Properties, Inc., a newly formed
Maryland corporation (the "REIT Corporation") which intends to qualify as a
REIT under federal tax laws, with and into USRP and, as a result, USRP will
become a subsidiary of the REIT Corporation. U.S. Restaurant Properties
Operating L.P. (the "Operating Partnership" and, together with USRP, the
"Partnerships") will remain in existence following consummation of the
Merger. The result of the Merger would be that holders of units of
beneficial interest of USRP (the "Units") would become stockholders of the
REIT Corporation. Consummation of the Merger is contingent upon the receipt
of a satisfactory ruling from the Internal Revenue Service as to the tax-free
nature of the Merger.
In the event such ruling is not received, the Conversion will be phased
in through the implementation of amendments to the partnership agreement of
USRP to permit holders of Units to exchange their Units for shares of the
REIT Corporation's common stock at any time and to require such an exchange
prior to the transfer of the Units to third parties, all as more fully
described in the accompanying Proxy Statement/Prospectus (the "Exchange
Alternative"). As a result, following consummation of the Conversion, each
Unitholder will effectively become a stockholder of the REIT Corporation.
The Exchange Alternative will be implemented only if USRP does not receive a
favorable ruling with respect to the tax-free nature of the Merger.
In addition, as part of the Conversion, in order for the REIT
Corporation to become self-advised, QSV Properties, Inc. (formerly U.S.
Restaurant Properties, Inc.), the Managing General Partner of USRP ("QSV"),
will withdraw as managing general partner of USRP and a corporate subsidiary
of the REIT Corporation will be substituted as managing general partner of
USRP pursuant to the terms of the merger agreement. As a result, as part of
each of the Merger Alternative and the Exchange Alternative, the consent of
the Limited Partners is being sought for certain amendments to the
partnership agreements of the Partnerships to provide for the withdrawal of
QSV as managing general partner and to provide the Partnerships with
increased flexibility to pursue business opportunities that compliment their
existing business strategy.
As there are two alternative methods proposed to implement the
Conversion, Limited Partners who support the Conversion should vote in favor
of both the Merger Alternative and the Exchange Alternative. The
accompanying Proxy Statement/Prospectus describes the Conversion and the
Merger Alternative and the Exchange Alternative in greater detail.
Only Limited Partners of record as of the close of business on April 30,
1997, are entitled to notice of, and to vote at, the Special Meeting. Such
Limited Partners may vote at the Special Meeting either in person or by
proxy. If you cannot attend the Special Meeting, please complete, sign, date
and return the accompanying proxy card in the enclosed stamped and
self-addressed envelope so that the proxyholders may vote the Units that you
hold as a Limited Partner pursuant to your instructions. If you attend the
Special Meeting, you may revoke your proxy and vote such Units in person.
Very truly yours,
QSV PROPERTIES, INC.,
(FORMERLY U.S. RESTAURANT PROPERTIES, INC.)
THE MANAGING GENERAL PARTNER
Dallas, Texas
May 5, 1997
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 28, 1997
U.S. RESTAURANT PROPERTIES, INC.
U.S. RESTAURANT PROPERTIES MASTER L.P.
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to the proposed conversion (the
"Conversion") of U.S. Restaurant Properties Master L.P. ("USRP") into a real
estate investment trust ("REIT"). The REIT Corporation (as defined below) will
be self-advised and will continue to expand the property ownership, management,
acquisition and marketing operations of USRP, through U.S. Restaurant
Properties Operating, L.P. (the "Operating Partnership" and, together with
USRP, the "Partnerships"). Upon completion of the Conversion, the Operating
Partnership will become a subsidiary of the REIT Corporation and the units of
beneficial interest of USRP (the "Units") will be eligible for sale on the New
York Stock Exchange (the "NYSE") as shares of common stock, $.001 par value per
share (the "Common Stock"), of the REIT Corporation. This Proxy
Statement/Prospectus and the accompanying form of proxy are first being mailed
to the Limited Partners on or about May 5, 1997.
This Proxy Statement/Prospectus is being furnished to the limited partners
(the "Limited Partners") of USRP in connection with the solicitation of proxies
by QSV Properties, Inc. (formerly U.S. Restaurant Properties, Inc.), in its
capacity as the managing general partner (the "Managing General Partner") of
USRP, for use at the special meeting of Limited Partners to be held on June 24,
1997 (the "Special Meeting"). At the Special Meeting, the Limited Partners
will be asked to approve the two alternative proposals to effect Conversion of
USRP into a REIT: (i) the Merger Alternative and (ii) the Exchange
Alternative.
The Merger Alternative would be effected through the tax-free merger of
USRP with a partnership subsidiary of the REIT Corporation, with USRP being the
surviving entity (the "Merger") and, as a result, becoming a subsidiary of the
REIT Corporation. See "The Conversion--The Merger Alternative." Pursuant to
the Merger, each holder of Units ("Unitholders") will receive one share of
Common Stock for each Unit so held. Consummation of the Merger is contingent
upon the receipt of a satisfactory ruling from the Internal Revenue Service as
to the tax-free nature of the Merger.
In the event such ruling is not received, the Conversion will be phased in
through the implementation of amendments to the partnership agreement of USRP
to permit Unitholders to exchange their Units for shares of Common Stock at any
time and to require such an exchange prior to the transfer of the Units to
third parties (the "Exchange Alternative"). The Exchange Alternative will be
implemented only if USRP does not receive a favorable ruling with respect to
the tax-free nature of the Merger.
In addition, as part of the Conversion, in order for the REIT Corporation
to become self-advised, the Managing General Partner will withdraw as managing
general partner of the
1
<PAGE>
Partnerships (with a corporate subsidiary of the REIT Corporation being
substituted as general partner of both Partnerships). In conjunction
therewith, the Managing General Partner will (i) convert its interest in (a)
its allocable share of income, profits, loss and distributions of the
Operating Partnership as general partner thereof, and (b) fees and
disbursements for the acquisition and management of the Operating
Partnership's properties (together, the "Operating Partnership General
Partner Interest"), payable to it pursuant to the terms of the partnership
agreement of the Operating Partnership or assign such interest to USRP
(depending upon how the Conversion is effected) and (ii) convert its interest
in USRP (together with the conversion described above, the "Termination") for
shares of Common Stock, an interest in the Operating Partnership and/or Units
(depending upon how the Conversion is effected) having in the aggregate a
value initially equal to 850,000 shares of Common Stock and will be eligible
to receive additional consideration in the year 2000 (together, the
"Acquisition Price"). Following the Termination, the executive officers and
other employees of the Managing General Partner will become executive
officers and employees of the REIT Corporation and no further management fees
will be payable. As a result, the Company will become self-advised. See
"The Conversion--Termination of Operating Partnership General Partner
Interest." As a result, as part of each of the Merger Alternative and
Exchange Alternative, the consent of the Limited Partners is being sought for
certain amendments to the partnership agreements of the Partnerships to
provide for the withdrawal of the Managing General Partner and to provide the
Partnerships with increased flexibility to pursue business opportunities that
compliment their existing business strategy.
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 36, FOR CERTAIN FACTORS RELEVANT
TO THE CONVERSION AND AN INVESTMENT IN THE COMMON STOCK, INCLUDING:
-- CONFLICT OF INTEREST OF THE MANAGING GENERAL PARTNER IN ESTABLISHING
ACQUISITION PRICE, WHICH WAS MITIGATED BY ESTABLISHING THE SPECIAL
COMMITTEE.
-- THE CONVERSION WILL RESULT IN CERTAIN BENEFITS TO THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES. IN PARTICULAR, AS A RESULT OF THE
TERMINATION, THE MANAGING GENERAL PARTNER WILL RECEIVE THE ACQUISITION
PRICE, THEREBY ENABLING IT TO REALIZE THE PRESENT VALUE OF PROJECTED
PAYMENTS OTHERWISE PAYABLE TO IT OVER A PERIOD OF YEARS PURSUANT TO
THE OPERATING PARTNERSHIP GENERAL PARTNER INTEREST. IN ADDITION,
ROBERT J. STETSON AND FRED H. MARGOLIN, EXECUTIVE OFFICERS AND
DIRECTORS OF THE MANAGING GENERAL PARTNER, WILL ENTER INTO EMPLOYMENT
CONTRACTS WITH THE REIT CORPORATION.
-- CERTAIN MATERIAL DIFFERENCES EXIST BETWEEN THE RIGHTS OF HOLDERS OF
UNITS AND HOLDERS OF SHARES OF COMMON STOCK, PRIMARILY RELATING TO
MANAGEMENT, VOTING RIGHTS AND THE RIGHT TO COMPEL DISSOLUTION.
-- ABSENCE OF DISSENTERS' APPRAISAL RIGHTS; ALL UNITHOLDERS WILL BE BOUND
BY THE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING UNITS.
-- NO ASSURANCE THAT THE MARKET PRICE OF THE COMMON STOCK WILL INITIALLY
OR THEREAFTER EQUAL THE MARKET PRICE OF THE UNITS.
-- CERTAIN ANTITAKEOVER PROVISIONS EXIST IN THE COMPANY'S AMENDED
ARTICLES OF INCORPORATION THAT MAY HAVE THE EFFECT OF DISCOURAGING A
CHANGE IN CONTROL
2
<PAGE>
UNDER CIRCUMSTANCES THAT COULD GIVE HOLDERS OF COMMON STOCK AN
OPPORTUNITY TO REALIZE A PREMIUM OVER THE THEN PREVAILING MARKET
PRICES.
-- LIMITATION ON PERCENTAGE OWNERSHIP OF SHARES OF COMMON STOCK AND OTHER
TRANSFER RESTRICTIONS.
-- TAXATION OF THE REIT CORPORATION AS A CORPORATION IF IT FAILS TO
QUALIFY AS A REIT.
-- STOCKHOLDERS WILL EXPERIENCE DILUTION IN THEIR PERCENTAGE INTEREST IN
THE COMPANY UPON FUTURE ISSUANCES OF SHARES OF COMMON STOCK, WHICH
GENERALLY DO NOT REQUIRE STOCKHOLDER APPROVAL.
-- ACQUISITION AND EXPANSION RISKS, INCLUDING THE FAILURE TO ACQUIRE
PROPERTIES CURRENTLY UNDER CONTRACT, THE INABILITY TO REFINANCE DEBT
AS IT MATURES AND THE DIFFICULTY OF MANAGING A RAPIDLY EXPANDING
PROPERTY PORTFOLIO.
-- THE INVESTMENT AND FINANCING POLICIES OF THE REIT CORPORATION WILL BE
DETERMINED BY ITS BOARD OF DIRECTORS AND CAN BE CHANGED AT ANY TIME
WITHOUT STOCKHOLDER APPROVAL.
A special committee (the "Special Committee"), consisting of the
independent members of the Board of Directors of the Managing General Partner
has reviewed and made recommendations with respect to the Acquisition Price
(as hereinafter defined) to be received by the Managing General Partner in
connection with the Termination. The Special Committee retained independent
legal counsel and retained Morgan Keegan & Company, Inc., as its independent
financial advisor, which has expressed its opinion that the Acquisition Price
is fair to the Unitholders from a financial point of view.
This Proxy Statement/Prospectus also constitutes a prospectus of U.S.
Restaurant Properties, Inc., a Maryland corporation (the "REIT Corporation"),
with respect to up to _____ shares of Common Stock to be issued by the REIT
Corporation pursuant to either (i) the merger agreement to be entered into
between the REIT Corporation and USRP in the event the Conversion is effected
pursuant to the Merger Alternative, or (ii) the exchange of Units for shares
of Common Stock in accordance with the terms and conditions of USRP's amended
partnership agreement in the event the Conversion is effected pursuant to the
Exchange Alternative.
On __________, 1997, the last reported sale price of the Units on the NYSE
was $__________ per Unit.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is ____________, 1997.
3
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE INTO
THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES
OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE REIT CORPORATION OR USRP. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/
PROSPECTUS NOR ANY DISTRIBUTION OF THE COMMON STOCK OFFERED HEREBY SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE REIT CORPORATION OR USRP SINCE THE DATE HEREOF OR THAT THE
INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR
THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. USRP UNDERTAKES TO PROVIDE
COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE), WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO PRESIDENT, QSV PROPERTIES, INC.,
5310 HARVEST HILL ROAD, SUITE 270, DALLAS, TEXAS 75230 (TELEPHONE (972)
387-1487, FAX (972) 490-9119). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, SUCH REQUESTS SHOULD BE RECEIVED BY APRIL 20, 1997.
AVAILABLE INFORMATION
USRP is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by USRP can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 West Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements and other
information may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. In addition, reports, proxy statements and
other information concerning USRP may be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
Reports, proxy statements and other information concerning USRP may also
be obtained electronically through a variety of databases, including, among
others, the Commission's Electronic Data Gathering and Retrieval ("EDGAR")
program, Knight-Rider Information Inc., Federal Filing/Dow Jones and
Lexis/Nexis.
The REIT Corporation has filed with the Commission a Registration
Statement on Form S-4 (together with all amendments, supplements and exhibits
thereto, the "Registration
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Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock to be issued pursuant to the
Conversion. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission are not necessarily complete, and in
each instance reference is made to the copy of such document so filed. Each
such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by USRP with the Commission
pursuant to the Exchange Act, are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
(2) Current Report on Form 8-K dated December 30, 1996, as amended
by the Form 8-K/A filed January 21, 1997, as further amended by the
Form 8-K/A filed February 11, 1997, and as further amended by the
Form 8-K/A filed April 3, 1997;
(3) Current Report on Form 8-K dated April 14, 1997; and
(4) Registration Statement on Form 8-A dated February 6, 1986 and
Amendment No. 1 to Registration Statement on Form 8-A dated February
20, 1986.
All documents filed by USRP pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Proxy Statement/Prospectus
and prior to the date of the Special Meeting shall be deemed to be incorporated
by reference herein and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus, including documents incorporated by
reference, contain forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the captions "Risk Factors" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition." In addition,
factors that could cause actual results of the Company to differ materially
from those contemplated by or projected, forecast, estimated or budgeted in
forward looking statements relating to the results of operations and business
of the Company following the Conversion include the following possibilities:
(i) the expected cost savings to be realized are not made or unanticipated
offsetting costs are incurred, and (ii) costs or difficulties related to the
conversion to a real estate investment trust are greater than expected.
Accordingly, there can be no assurance that the actual results will conform to
the forward-looking statements in this Proxy Statement/Prospectus.
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TABLE OF CONTENTS
AVAILABLE INFORMATION 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 5
FORWARD-LOOKING STATEMENTS 6
SUMMARY 14
Overview of the Conversion 14
The Special Meeting 14
Risk Factors 15
Disadvantages of the Conversion 17
Advantages of the Conversion 19
Advantages to Unitholders 19
Advantages to the Managing General Partner/Management 20
Recommendation of the Managing General Partner 21
Conflicts of Interest 21
The Company 22
Mechanics of the Conversion 24
The Merger Alternative 24
Exchange Alternative 26
Termination of the Operating Partnership General Partner Interest 27
General 27
The Fairness Opinion 28
Analysis of Alternatives Considered 28
Continuation of USRP 28
Liquidation of USRP 28
Allocation of Shares of Common Stock Among Unitholders and
the Managing General Partner 28
No Dissenters' Appraisal Rights 29
Tax Consequences of the Conversion 29
Tax Consequences of the Merger Alternative 29
REIT Status 30
Certain Taxes Imposed on a REIT 31
Distribution Requirements 31
Tax Consequences of the Exchange Alternative 32
Summary of Comparison of Taxation of Stockholders and Unitholders 32
Taxation of Stockholders 32
Taxation of Unitholders 33
Effects of the Conversion on Rights of Unitholders 34
Comparison of Rights of Unitholders and Stockholders 34
Market Prices of Units and Distributions 36
RISK FACTORS 37
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Conflicts of Interest 37
Benefits to Managing General Partner/Management 37
Material Differences in Rights of the Units and Common Stock 38
Absence of Appraisal Rights 38
Substitution of Trading of Common Stock for Units 39
Effect of Certain Antitakeover Provisions and Ownership Limits
on Change in Control 39
Charter Provisions 39
Staggered Board 39
Preferred Stock 39
Meetings of Stockholders 40
Business Combinations 40
Control Share Acquisitions 40
Restrictions on Transfer 41
Adverse Consequences of Failure to Qualify as a REIT; Other
Tax Liabilities 41
Future Dilution 42
Acquisition and Expansion Risks 42
Failure to Acquire Acquisition Properties 42
Risk of Failure to Refinance Existing Indebtedness 42
No Limitation on Incurrence of Debt 43
Risks that the Corporation May Not Be Able to Manage
Expanded Portfolio 43
No Restrictions on Changes in Investment, Financing and
Other Policies 43
Adverse Effect of Increases in Interest Rates 43
Possible Adverse Tax Consequences of the Conversion 44
Risk that IRS Withdraws Ruling 44
Risk of Loss of Partnership Status 44
Investment Concentration in Single Industry 45
Dependence on Success of Burger King 45
Failure to Renew Leases and Franchise Agreements 45
Real Estate Investment Risks 45
General Risks 45
Illiquidity of Real Estate May Limit Its Value 46
Possible Environmental Liabilities 46
Costs of Compliance with Americans with Disabilities Act 47
Uninsured and Underinsured Losses Could Result in Loss of Value
of Facilities 47
Dependence on Key Personnel 47
Impact of Competition on Operations 48
Acquisitions 48
Operations 48
Risks Associated with Property Development 48
Risks Newly-Constructed Restaurant Properties Do Not Perform as
Expected 49
THE COMPANY 49
History and Structure of USRP 49
The REIT Corporation 49
Strategy 50
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THE CONVERSION 52
Background of the Conversion 52
Disadvantages of the Conversion 53
Possible Disadvantages Resulting from REIT Status 53
Loss of Section 754 Benefits 53
Restrictions on Transfer of Shares of Common Stock 54
Modification of Investing and Financing Policies 54
Advantages of the Conversion 54
Advantages to Unitholders 54
Advantages to the Managing General Partner/Management 56
The Merger Alternative 57
The Merger Agreement 57
Amendments to the Partnership Agreements 59
Exchange Alternative 62
Termination of the Operating Partnership General Partner Interest 62
General 62
Operating Partnership General Partner Interest and USRP Interest 63
The Acquisition Price 64
REIT Corporation Officer Compensation 65
Withdrawal Agreement 65
Conflicts of Interest 66
Analysis of the Special Committee 66
Fairness Opinion 70
Morgan Keegan Fairness Opinion 70
Experience of Morgan Keegan 71
Summary of Matters Considered 71
Scope of Opinion 72
Assumptions 72
Analysis and Conclusion 72
Compensation and Material Relationships 76
Analysis of Alternatives Considered 77
Continuation of USRP 77
Liquidation of USRP 77
Comparison of Values 77
Continuation of USRP 77
Liquidation of USRP 78
Allocation of Shares of Common Stock Among Unitholders and the
Managing General Partner 78
Executive Compensation 79
No Dissenters' Appraisal Rights 79
Costs of the Conversion 80
Consequences If Conversion Is Not Approved 80
Fiduciary Duties 80
Accounting Treatment 81
THE SPECIAL MEETING 82
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Eligible Units 82
Required Legal Opinion 82
Required Vote 83
Abstentions and Broker Non-Votes 83
Proxies 83
Revocation of Proxies 84
Proxy Solicitor 84
Solicitations by the Managing General Partner 84
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER DATA 85
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 87
Overview 87
Results of Operations 88
Cash Flow from Operations Based Upon Taxable Income 89
Liquidity and Capital Resources 89
Inflation 90
Seasonality 91
BUSINESS 92
General 92
Industry 93
Investment Criteria 94
Properties 95
Leases with Restaurant Operators 97
Ownership of Real Estate Interests 98
Use and Other Restrictions on the Operation and Transfer of
BURGER KING Restaurant Properties 99
Restaurant Alterations and Reconstruction 100
Competition 100
Regulation 101
Environmental Regulation 101
Americans With Disabilities Act 101
Land-Use and Safety Regulations 102
Health Regulations 102
Insurance 102
Employees 103
Legal Proceedings 103
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES 103
Investment Policies 103
Investments in Real Estate or Interests in Real Estate 103
Investments in Real Estate Mortgages 104
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Securities of or Interests in Persons Primarily Engaged in
Real Estate Activities and Other Issuers 104
Periodic Review of Assets 104
Financing Policies 104
Affiliate Transaction Policy 105
Certain Other Policies 106
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY 106
CAPITALIZATION 109
MANAGEMENT 110
Directors and Executive Officers 110
Executive Compensation 111
Employment Agreements 112
Indemnification Agreements 113
Insurance 113
Certain Transactions with Related Parties 113
PRINCIPAL STOCKHOLDERS 113
DESCRIPTION OF CAPITAL STOCK 114
Description of Securities 114
General 114
Common Stock 114
Preferred Stock 115
Restrictions on Transfer 115
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE REIT CORPORATION'S
ARTICLES AND BYLAWS 118
Classification of the Board of Directors 118
Limitation of Liability and Indemnification 119
Business Combinations 120
Control Share Acquisitions 120
Amendment to the Articles 121
Dissolution of the Company 121
Advance Notice of Director Nominations and New Business 122
Meetings of Stockholders 122
COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS 122
General 122
Management 123
Voting Rights 123
Special Meetings 124
Amendment of Master Partnership Agreement and Articles
of Incorporation 124
Limited Liability 125
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Dissolution of the Partnership and the REIT Corporation
and Termination of REIT Status 126
Liquidation Rights 126
Limitations of Liability of General Partners and Trustees 127
Indemnification 127
Derivative Actions 127
Inspection of Books and Records 128
Distributions and Dividends 128
FEDERAL INCOME TAX CONSIDERATIONS 128
A. The Merger Alternative 129
1. Qualification as Nonrecognition Transaction 129
2. Tax Consequences to USRP 130
3. Tax Consequences to Unitholders 131
4. Tax Consequences to the REIT Corporation 133
5. Tax Consequences of the REIT Corporation's Qualification
as a REIT 134
B. The Exchange Alternative 145
1. Partnership Status 145
2. Partner Status 147
3. Tax Consequences of Unit Ownership 148
4. Tax Treatment of Operations 150
5. Alternative Minimum Tax 152
6. Tax-Exempt Entities, Regulated Investment Companies
and Foreign Investors 153
7. Uniformity of Units 154
8. Disposition of Units: Exchange for Shares in the REIT
Corporation 154
9. Constructive Termination or Dissolution of Partnership 156
10. Partnership Income Tax Information Returns and
Partnership Audit Procedures 157
11. Information Return Filing Requirements 158
12. Nominee Reporting 158
13. State and Other Taxes 158
C. Differences between a Partnership and a REIT 159
ERISA CONSIDERATIONS 160
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs 160
Status of the Company under ERISA 161
LEGAL MATTERS 162
EXPERTS 162
INDEX TO FINANCIAL STATEMENTS F-1
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APPENDIXES
A. Agreement and Plan of Merger A-1
B. Fairness Opinion B-1
C. Material Amendments to Master Partnership Agreement C-1
D. Material Amendments to Operating Partnership Agreement D-1
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO. LIMITED PARTNERS ARE URGED TO READ CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. AS USED IN
THIS PROXY STATEMENT/PROSPECTUS, UNLESS OTHERWISE REQUIRED BY THE CONTEXT, THE
TERM "REIT CORPORATION" MEANS U.S. RESTAURANT PROPERTIES, INC., A MARYLAND
CORPORATION, THE TERM "USRP" MEANS U.S. RESTAURANT PROPERTIES MASTER L.P., THE
TERM "OPERATING PARTNERSHIP" MEANS U.S. RESTAURANT PROPERTIES OPERATING L.P.,
AND THE TERM "MANAGING GENERAL PARTNER" MEANS QSV PROPERTIES, INC. (FORMERLY
U.S. RESTAURANT PROPERTIES, INC., A DELAWARE CORPORATION), IN ITS CAPACITY AS
MANAGING GENERAL PARTNER OF EACH OF THE PARTNERSHIPS. USRP AND THE OPERATING
PARTNERSHIP ARE GENERALLY REFERRED TO TOGETHER HEREIN AS THE "PARTNERSHIPS."
ALL REFERENCES HEREIN TO THE "COMPANY" WHEN USED WITH RESPECT TO THE
ACQUISITION, OWNERSHIP AND OPERATION OF THE PROPERTIES REFER TO THE COMBINED
OPERATIONS OF THE PARTNERSHIPS, PRIOR TO THE CONVERSION, AND THE COMBINED
OPERATIONS OF THE REIT CORPORATION AND THE PARTNERSHIPS, AS APPLICABLE,
FOLLOWING THE CONVERSION.
OVERVIEW OF THE CONVERSION
This Proxy Statement/Prospectus relates to a proposal to convert USRP into
a REIT in a tax-free transaction. As it is presently constituted, USRP is a
publicly-traded limited partnership. As a result of the Conversion, the
Operating Partnership will become a subsidiary of the REIT Corporation and the
Units will be eligible for sale on the NYSE as shares of Common Stock. The
REIT Corporation will become "self-advised" through the conversion by the
Managing General Partner of the Operating Partnership General Partner Interest
and the subsequent employment of the management team of the Managing General
Partner by the REIT Corporation. FOR THE CONVERSION TO BE COMPLETELY APPROVED,
THE AFFIRMATIVE VOTE OF THE HOLDERS OF MORE THAN 50% OF THE TOTAL NUMBER OF
OUTSTANDING UNITS IS REQUIRED FOR APPROVAL OF BOTH THE MERGER ALTERNATIVE AND
THE EXCHANGE ALTERNATIVE. ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE CONVERSION.
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING. The Special Meeting will be held
on Tuesday, June 24, 1997, at 10:00 a.m. (Dallas time), at the offices of USRP,
5310 Harvest Hill Road, Suite 270, Dallas, Texas. At the Special Meeting, the
Limited Partners will be asked to approve the Conversion through the approval
of both the Merger Alternative and the Exchange Alternative.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE. The Managing General
Partner has fixed the close of business on April 30, 1997 as the record date
(the "Record Date") for the determination of Limited Partners entitled to
notice of, and to vote at, the Special Meeting and any adjournment thereof. On
the Record Date, USRP had issued and outstanding _____________ Units.
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VOTING AND REVOCATION OF PROXIES. To vote by proxy, a Limited Partner
must complete, sign, date and deliver the proxy card to D. F. King & Company
before the Special Meeting. Unless indicated to the contrary on the proxy
card, the directions given on the proxy card will be for all of the Units that
such Limited Partner may vote. If a Limited Partner signs and returns a proxy
card without giving any directions, the proxyholder will vote such Limited
Partner's Units for the approval of both the Merger Alternative and the
Exchange Alternative.
A Limited Partner may revoke its proxy at any time prior to the
proxyholder's voting of the Units to which such proxy applies by: (i)
submitting a later dated proxy to D.F. King & Company or someone else who
attends the Special Meeting, (ii) attending the Special Meeting and delivering
a written notice of revocation of the proxy to the representative of D.F. King
& Company present at the Special Meeting, or (iii) delivering a written notice
of revocation of the proxy to D.F. King & Company at 77 Water Street, New York,
New York 10005, which D.F. King & Company receives on or before June 23, 1997.
RISK FACTORS
The Conversion and an investment in shares of Common Stock involve certain
risks. Such risks include, among others:
- A majority of the members of the Board of Directors of the
Managing General Partner, by virtue of their ownership interests in
and/or positions or affiliations with the Managing General Partner
were subject to a conflict of interest in determining the Acquisition
Price. This risk has been mitigated by the appointment of the
Special Committee consisting of the two unaffiliated directors.
- The Conversion will result in certain benefits to the Managing
General Partner and its affiliates. In particular, as a result of
the Termination, the Managing General Partner will receive the
Acquisition Price, thereby enabling it to realize the present value
of projected payments otherwise payable to it over a period of years
pursuant to the Operating Partnership General Partner Interest. In
addition, Robert J. Stetson and Fred H. Margolin, executive officers
and directors of the Managing General Partner, will enter into
employment contracts with the REIT Corporation.
- Material differences exist between the rights of holders of the
Units and holders of shares of Common Stock, primarily relating to
management, voting rights and the right to compel dissolution.
- Unitholders are afforded no dissenters' appraisal rights or
other similar rights in connection with the Conversion under
applicable law or the Master Partnership Agreement, nor will such
rights be voluntarily accorded to the Unitholders by the Company.
Consequently, all Unitholders will be bound by the vote of
Unitholders owning a majority of the outstanding Units.
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- It is possible that the per share prices at which the Common
Stock trades will be less than the per Unit prices at which the Units
have traded. As a result, the value of the stockholders' investment
in the REIT Corporation following the Conversion could be lower than
the value of their investment in USRP prior to the Conversion.
- The potential anti-takeover effect of limiting individual share
ownership to 8.75% of the outstanding Common Stock (with certain
exceptions) and certain other provisions contained in the
organizational documents of the Company, such as the ability to issue
shares of preferred stock, the staggered board of directors and the
business combination provision, any of which may discourage a change
in control and may limit any opportunity for the Company's
stockholders to receive a premium for their Common Stock.
- The ownership limit provided for in the REIT Corporation's
Amended Articles of Incorporation (the "Articles") may restrict the
transfer of Common Stock.
- Taxation of the REIT Corporation as a corporation if it fails to
qualify as a REIT and the REIT Corporation's liability for certain
federal, state and local income taxes in such event.
- Future dilution in the percentage interest of the Company held
by holders of Common Stock as a result of the issuance of additional
shares of Common Stock in connection with any public offering by the
REIT Corporation to raise additional equity capital.
- Risks associated with the acquisition and expansion of the
Company including the failure to acquire properties currently under
contract, uncertainty that the Company will be able to refinance its
indebtedness when due and the risk of higher interest rates or other
unfavorable terms on debt incurred to refinance such indebtedness,
and the risk of potential increases in leverage due to the absence of
a provision in the organizational documents of the Company that
limits the amount of debt that the Company may incur.
- The ability of the REIT Corporation's board of directors (the
"REIT Board") to change the investment, financing and other policies
of the Company at any time without stockholder approval.
- Increases in market interest rates may lead prospective
purchasers of the Common Stock to demand a higher annual yield from
future distributions, which may adversely affect the market price of
the Common Stock.
- The implementation of the Merger Alternative will depend upon
the receipt of a favorable ruling from the IRS, which will be
conditioned upon certain representations and warranties that, if
subsequently determined to be inaccurate, would result in the IRS no
longer being bound by the ruling.
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- Concentration on fast food and casual dining restaurant properties.
- Dependence on the success of Burger King.
- Possible rent defaults and failure to renew leases and franchise
agreements.
- Real estate investment risks, such as the effect of economic and
other conditions on multifamily property values (including the
dependence of the properties on the economies of the metropolitan
areas where they are located), the ability of the properties to
generate revenues sufficient to meet operating expenses, including
future debt service, the illiquidity of real estate investments,
potential liability of the Company for unknown or future
environmental liabilities and costs of compliance with the Americans
with Disabilities Act of 1990 and similar laws, and potential losses
in the event of a casualty or other liability that is uninsurable or
not economically insurable.
- The dependence of the Company on the efforts of its executive
officers, particularly Robert J. Stetson and Fred H. Margolin.
- Competition from other entities and individuals in the
acquisition of triple net leased restaurant properties and from other
national and regional fast food restaurant chains.
- New project development risks, including construction delays or
costs that may exceed budgeted or contracted amounts, new project
commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of
development costs in connection with projects that are not pursued to
completion.
- The risk that newly-constructed restaurant properties will not
produce desired revenue levels (and, therefore, lease rentals) once
opened.
For a more thorough discussion of each of these risks, see "Risk Factors."
DISADVANTAGES OF THE CONVERSION
The Board of Directors of the Managing General Partner (the "Board of
Directors") believes that the Conversion may have the following disadvantages
which it believes will be substantially outweighed by the advantages discussed
below:
- The REIT Corporation was organized and intends to conduct its
operations so as to qualify for taxation as a REIT under the
applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). A qualified REIT may avoid paying federal
income tax because it is allowed to deduct certain dividends or
distributions paid to its stockholders in computing its taxable
income. To qualify as a REIT, the REIT Corporation is required,
among other things, to meet certain
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stock ownership, income, asset and distribution rules and tests.
Under certain circumstances, the failure of the REIT Corporation to
meet the qualification rules and tests could cause the REIT
Corporation to be taxed as a corporation, in which case dividends
paid to the stockholders would not be deductible by the REIT
Corporation in computing its taxable income, subjecting the REIT
Corporation to entity-level taxes to which USRP is not subject.
- A person who acquires Units is entitled to certain benefits
relating to basis adjustments under Section 754 of the Code upon the
sale or exchange of Units or the death of a Unitholder. There will
be no Section 754 adjustments upon the sale or exchange of shares of
Common Stock or the death of a stockholder of the REIT Corporation.
The basis adjustments attributable to Unitholders will become part of
the REIT Corporation's basis for its assets at the time of the
Conversion. Unitholders who would have been entitled to additional
depreciation deductions attributable to such adjustments will no
longer be able to use such deductions to reduce their share of annual
income from distributions from the REIT Corporation. The REIT
Corporation's depreciation deductions will be allocated ratably among
the stockholders of the REIT Corporation in determining the portion
of the distributions by the REIT Corporation that will be taxable by
the recipients thereof as ordinary dividends. As a result,
Unitholders with significant Section 754 adjustments (generally those
who purchased their Units at higher prices and on more recent dates)
will generally recognize somewhat greater amounts of taxable income
each year following the Conversion then if the Conversion had not
occurred.
- Certain provisions of the Articles may have the effect of
discouraging a third party from making an acquisition proposal for
the Company and may thereby inhibit a change in control of the
Company. In addition, the Articles prohibit ownership either
directly or indirectly under applicable attribution rules of the Code
of more than 8.75% of the shares of Common Stock by any stockholder,
subject to certain exceptions. Such ownership limit may have the
effect of preventing an acquisition of control of the Company without
the approval of the REIT Board. Finally, under Maryland law, certain
business combinations between a Maryland corporation and an
"Interested Stockholder" (as hereinafter defined) are prohibited for
five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. The existence of these
contractual and statutory prohibitions on the transfer of stock and
the acquisition of control may inhibit a change in control of the
Company under circumstances that could give the holders of shares of
Common Stock the opportunity to realize a premium over the
then-prevailing market prices. The partnership agreement of USRP
(the "Master Partnership Agreement") does not contain any such
provisions, and USRP, as a Delaware limited partnership, is not
subject to the same statutory prohibitions on business combinations.
- The investment and financing policies of the Company following
the Conversion will be determined by the REIT Board. These policies
may be amended or
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revised at any time and from time to time at the discretion of the
REIT Board without a vote of the stockholders or partners of the
Company.
See "Risk Factors" and "The Conversion--Disadvantages of the Conversion."
ADVANTAGES OF THE CONVERSION
ADVANTAGES TO UNITHOLDERS
The Board of Directors is recommending that the Limited Partners vote in
favor of the Conversion by voting in favor of both the Merger Alternative and
the Exchange Alternative because it believes that the Conversion will result in
the following advantages to the Unitholders:
As part of the Conversion, the Managing General Partner will be
withdrawing as managing general partner of the Partnership, and as a
result, the REIT Corporation will become self-advised and will, as a
result of the termination of all management fees, have additional
cash for distribution to its stockholders. For the year ended
December 31, 1996, the Managing General Partner was paid $2.5 million
with respect to the Operating Partnership General Partner Interest
and its general partner interest in USRP (the "USRP Interest"). In
addition, because the fee which would be payable to the Managing
General Partner pursuant to the Operating Partnership General Partner
Interest increases by at least 1% of the value of new acquisitions,
the savings to the Company from the Termination will continue to grow
as the Company acquires additional properties. In order for the
Termination to be accretive (I.E. increase the cash available for
distribution per Unit or share relative to USRP remaining as an
advised entity) to the Unitholders on a cash available for
distribution per Unit basis, the Company needs to acquire an
additional $44 million of properties, assuming the acquired
properties produce the same rate of return as the historical rate of
return on the Company's properties. As of April 17, 1997, the
Company had approximately $72 million worth of properties under
binding contract. Accordingly, on a pro forma basis, after giving
effect to the Termination and the acquisition of such additional
properties, as of December 31, 1996, the cash available for
distribution per Unit for 1996 would have increased from $2.62 to
$2.67. There can be no assurance that all of such properties will be
acquired or that additional properties will be available at prices
acceptable to the Company. Additionally, pro forma results are not
necessarily indicative of what the Company's financial position would
have been had such transactions occurred on the issuance date. See
"Risk Factors--Acquisition and Expansion Risks," "Selected Historical
and Pro Forma Financial Information and Other Data" and "Price Range
of Units and Distribution Policy." These initial savings in the first
year are partially offset by the one-time costs of completing the
Conversion (all of which are payable by USRP), currently estimated to
be $580,000. See "The Conversion--Costs of the Conversion."
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- The greater number of investors that currently consider
investments in REITs as compared to partnerships may affect the
market price per share of Common Stock versus the market price per
Unit, based on comparable levels of the Company's operating
performance, although no assurance can be given that any increase
will occur.
- Management believes that, based upon the large amounts of
capital raised by REITs during the past several years, the higher
level of holdings by institutional investors and the greater number
of research analysts and brokerage firms following and making markets
in REITs as compared to real estate limited partnerships, the Company
may have greater access to public and private sources of debt and
equity capital than it now has, potentially enabling the Company to
raise capital on more favorable terms than are now available.
Because the Company's strategy is to continue to acquire properties
to increase earnings and dividends, the ability to access more, lower
cost capital should enable the Company to grow at a more rapid rate.
- Following the Conversion, the Company will be able to raise
additional capital through the issuance of various classes of
securities (including preferred stock) which may not be dilutive to
holders of Common Stock.
- Following the Conversion, the Operating Partnership will remain
in existence. As a result, the REIT Corporation will be an "umbrella
partnership" REIT ("UPREIT"), thereby permitting the Company to
continue to acquire properties in tax-free exchanges with other
partnerships.
- The Conversion is expected to ultimately result in cost savings
of approximately $200,000 per year as a result of the elimination of
the need to generate and mail certain tax reporting information to
Limited Partners. Upon receipt of shares of Common Stock, Limited
Partners will also be relieved of having to deal with the burdensome
and time consuming Federal income tax reporting attributable to a
publicly-traded partnership. These initial savings in the first year
are partially offset by the one-time costs of completing the
Conversion (all of which are payable by USRP), currently estimated to
be $580,000. See "The Conversion--Costs of the Conversion."
ADVANTAGES TO THE MANAGING GENERAL PARTNER/MANAGEMENT
In addition to the advantages described above which apply to all
Unitholders (including the Managing General Partner following the Termination),
the Managing General Partner and management thereof will realize the following
benefits from the Conversion:
- The Managing General Partner will receive an additional benefit
from the Conversion as a result of the receipt of the Acquisition
Price (as hereinafter defined) consisting of shares of Common Stock,
Units and/or an interest in the Operating Partnership as a result of
the conversion of its Operating Partnership
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General Partner Interest. Receipt of the Acquisition Price enables
the Managing General Partner to immediately realize the present
value of the projected payments otherwise payable to it pursuant to
the Operating Partnership General Partner Interest. The
Acquisition Price consists of (i) the 850,000 Initial Shares (as
hereinafter defined), which would have a value of $24,225,000
assuming the market price of an Initial Share (which could be a
share of Common Stock, a Unit or an interest in the Operating
Partnership) at the time of its issuance is comparable to the
market price of a Unit ($28.50 at April 25, 1997) and (ii) up to
550,000 Contingent Shares (as hereinafter defined), which would
have a value of up to $15,675,000 assuming the market price of a
Contingent Share (which could be a Unit or an interest in the
Operating Partnership) at the time of its issuance is comparable to
the market price of a Unit ($28.50 at April 25, 1997).
- Each of Messrs. Stetson and Margolin, the President and Chief
Executive Officer and Chairman of the Board and Treasurer,
respectively, of the Managing General Partner, will be employed by
the REIT Corporation in similar capacities for compensation
commencing at $250,000 per year, subject to increases (up to a
maximum annual salary and cash bonus of $300,000 until the end of the
year 2000) at the discretion of the REIT Board, and will be eligible
to receive annual incentive stock options.
See "The Conversion--Advantages of the Conversion." The advantages of the
Conversion should be considered by the Limited Partners in light of the
disadvantages of and the risks associated with the Conversion. See "Risk
Factors" and "The Conversion--Disadvantages of the Conversion."
RECOMMENDATION OF THE MANAGING GENERAL PARTNER
The Board of Directors has approved the Conversion and has determined that
the Conversion and each of the Merger Alternative and the Exchange Alternative
(to be implemented only if a favorable ruling as to the tax-free nature of the
Merger is not received from the Internal Revenue Service) are in the best
interests of, and on terms that are fair to, the Unitholders. The Managing
General Partner recommends approval and adoption of the Conversion by the
Unitholders. The Board of Directors believes that the Conversion will result
in the benefits to the Limited Partners described above under "--Advantages of
the Conversion." The Board of Director's substantive recommendations and
conclusions are based on the analysis of the advantages, the disadvantages and
the risks of converting from partnership to REIT form and making the changes in
operating format described herein. See "Risk Factors," "The Conversion--
Disadvantages of the Conversion" and "--Advantages of the Conversion."
CONFLICTS OF INTEREST
In considering the recommendation of the Managing General Partner with
respect to the Conversion, the Limited Partners should be aware that a majority
of the members of the Board of Directors, by virtue of their ownership
interests in and/or positions or affiliations with the
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Managing General Partner, were subject to conflicts of interest in
determining the consideration to be received by the Managing General Partner
with respect to the Termination. Accordingly, the Board of Directors
appointed a special committee (the "Special Committee") composed of the
independent members thereof to negotiate the Acquisition Price on behalf of
the Unitholders. Neither member of the Special Committee is an affiliate of,
or otherwise has any economic interest in, the Managing General Partner.
Morgan Keegan & Company, Inc. ("Morgan Keegan"), the Special Committee's
financial advisor, has rendered an opinion that, as of the date hereof, the
Acquisition Price is fair, from a financial point of view, to the
Unitholders. The Board of Directors does not believe that the intention of
the members of the Special Committee to serve as directors of the REIT
Corporation following the Conversion results in a material conflict of
interest.
THE COMPANY
USRP. USRP acquires, owns and manages income-producing properties that it
leases on a triple net basis to operators of fast food and casual dining
restaurants, primarily BURGER KING-Registered Trademark- (BURGER KING-
Registered Trademark- is a registered trademark of Burger King Brands, Inc.)
and other national and regional brands, including DAIRY QUEEN-Registered
Trademark- (DAIRY QUEEN-Registered Trademark- is a registered trademark of
American Dairy Queen Corporation), HARDEE'S-Registered Trademark- is a
registered trademark of Hardee's Food Systems, Inc.) and CHILI'S-Registered
Trademark- (CHILI'S-Registered Trademark- is a registered trademark of Brinker
Restaurant Corporation). USRP acquires properties either from third party
lessors or from operators on a sale/leaseback basis. Under a triple net lease,
the tenant is obligated to pay all costs and expenses, including all real
property taxes and assessments, repairs and maintenance and insurance. Triple
net leases do not require substantial reinvestment by the property owner and,
as a result, more cash from operations may be used for distributions to
Unitholders or for acquisitions.
USRP is one of the largest publicly-owned entities in the United States
dedicated to acquiring, owning and managing restaurant properties. At April
17, 1997, USRP's portfolio consisted of 367 restaurant properties in 44 states
(the "Properties"), approximately 99.5% of which were leased. From USRP's
initial public offering in 1986 until March 31, 1995, USRP's portfolio was
limited to approximately 125 restaurant properties, all of which were leased on
a triple net basis to operators of Burger King restaurants. In May 1994, an
investor group led by Robert J. Stetson and Fred H. Margolin acquired the
Managing General Partner. In March 1995, certain amendments to the Partnership
Agreements were proposed by the new management and adopted by the Limited
Partners which amendments authorized USRP to acquire additional properties,
including restaurant properties not affiliated with Burger King Corporation
("BKC"). Since adoption of the amendments, through April 17, 1997, USRP has
acquired 245 properties for an aggregate purchase price of approximately $144
million, including 229 properties acquired since January 1, 1996, and has
entered into binding agreements to acquire 119 additional restaurant properties
(the "Acquisition Properties") for an aggregate purchase price of approximately
$72 million. Upon acquisition of the Acquisition Properties, USRP's portfolio
will consist of an aggregate of 486 properties in 44 states, consisting of 173
BURGER KING restaurants, 42 DAIRY QUEEN restaurants, 30 GRANDY'S-Registered
Trademark- (GRANDY'S-Registered Trademark- is a registered trademark of
Grandy's, Inc.) restaurants, 31 HARDEE'S restaurants, 22 PIZZA HUT-Registered
Trademark- (PIZZA HUT-Registered Trademark- is a registered trademark of Pizza
Hut, Inc.) restaurants, 12
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SCHLOTZSKY'S-Registered Trademark- (SCHLOTZSKY's is a registered trademark of
Schlotzsky's, Inc.) restaurants, eight CHILI'S restaurants, 78
ARBY'S-Registered Trademark- (ARBY'S-Registered Trademark- is a registered
trademark of Triarc Corp.) restaurants, 17 BRUEGGER'S BAGEL-Registered
Trademark- (BRUEGGER'S BAGEL-Registered Trademark- is a registered trademark
of Bruegger's Corporation) restaurants and 73 other properties, most of which
are regional brands.
USRP is a Delaware limited partnership. The principal executive offices
of USRP and the Managing General Partner are located at 5310 Harvest Hill Road,
Suite 270, Dallas, Texas 75230. The telephone number is (972) 387-1487.
The REIT Corporation. The REIT Corporation is a newly-formed Maryland
corporation, all of the stock of which is currently owned by the Managing
General Partner, that was organized to succeed to the operations of USRP
pursuant to the Conversion. The REIT Corporation has not engaged in any
activities other than in connection with its organization and the Conversion.
Upon consummation of the Conversion pursuant to the Merger, the current
partners of USRP will become stockholders of the REIT Corporation and the
Operating Partnership will become a subsidiary of the REIT Corporation. In the
event that the Exchange Alternative is used to effect the Conversion, the REIT
Corporation will become a limited partner of the Operating Partnership and the
Unitholders will have the right to exchange their Units for shares of Common
Stock.
The principal executive offices of the REIT Corporation are located at
5310 Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone number
is (972) 387-1487.
BUSINESS AND ACQUISITION STRATEGY. After the Conversion, the Company's
strategy will be to continue its operations in substantially the same manner in
which it has been operated and to acquire, develop, own and manage additional
properties throughout the United States and internationally. In conjunction
with the Conversion, the Partnership Agreements are being amended to provide
the Company with increased flexibility to pursue other investment opportunities
that arise during the ordinary course of acquiring and leasing restaurant
properties and that compliment its existing business strategy. As part of its
strategy of expanding its restaurant property portfolio, the Company intends to
build-out properties in conjunction with other food vendors, such as
convenience stores, and retail outlets and may, from time to time, originate
loans secured by real estate. See "The Company--Strategy" and "Business--
General."
The Company's primary business objective will be to maximize cash
available for distribution to its stockholders and partners, if any. The
Company will seek to achieve growth in cash available for distribution by
aggressively managing and leasing the Properties and by acquiring other
restaurant properties. Cash available for distribution will also be affected
by external factors such as inflation and changes in general economic
conditions. The Company's business objectives also include protecting the
Company's capital and providing the opportunity to realize capital growth from
appreciation in the value of a diversified portfolio of investments. There can
be no assurance that these objectives will be realized. The Company intends to
continue to expand its portfolio by acquiring triple net leased properties and
structuring sale/leaseback transactions consistent with its existing strategies
prior to the Conversion. Those strategies include focusing primarily on
restaurant properties, investing in major restaurant brands, acquiring existing
restaurants, consolidating smaller portfolios and maintaining a conservative
capital structure.
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The Company's investments may be in any form of debt, equity, convertible
or hybrid instrument or combination thereof. Equity investments will generally
be made with the intention of a long-term holding period. Although debt
investments also are expected to be generally long-term in nature, the term of
such instruments is subject to individual circumstances. It is possible the
Company's investments may be subject to existing mortgage financing and other
indebtedness which have priority over the interests of the Company. The
Company may pursue its investment objectives independently and/or with other
entities, through joint ventures or other types of co-ownership, in which the
Company may have a majority or minority position. See "Policies with Respect
to Certain Activities--Investment Policies."
The Company's management team consists of senior executives with extensive
experience in the acquisition, operation and financing of fast food and casual
dining restaurants. As a result, management has an extensive network of
contacts within the franchised fast food and casual dining restaurant industry.
See "Management."
MECHANICS OF THE CONVERSION
THE MERGER ALTERNATIVE
GENERAL. If approved by the Unitholders, the Conversion will be effected
by the Merger Alternative unless the Company does not receive a satisfactory
private letter ruling (the "Ruling") from the Internal Revenue Service (the
"IRS") regarding the tax-free nature of the Merger prior to August 31, 1997, or
such later date as may be agreed to by the Special Committee, in its sole
discretion. If the Ruling is not received, the Conversion will be effected by
the Exchange Alternative. See "--The Exchange Alternative." If the Ruling is
satisfactory to the Managing General Partner, the Conversion would be effected
by the Merger Alternative pursuant to the terms and conditions of the Merger
Agreement. In accordance with the terms of the Merger Agreement, USRP
Acquisition, L.P. (the "REIT Sub"), a Delaware partnership that is an
indirectly wholly-owned subsidiary of the REIT Corporation, will be merged with
and into USRP with USRP being the surviving entity. The Operating Partnership
will remain in existence following the Merger, with USRP, the REIT Corporation
and one or more of the REIT Corporation's corporate subsidiaries as the sole
partners thereof following consummation of the Merger.
If the Merger Alternative is approved by the Limited Partners and a
satisfactory Ruling is received from the IRS, the Conversion would be effected
by the Merger as follows:
- The Unitholders will receive in exchange for their Units one (1)
share of Common Stock for each Unit held by them prior to the
Conversion, or an aggregate of 7,453,250 shares of Common Stock (99%
of all shares of Common Stock to be outstanding immediately following
the Conversion) on account of the Unitholders' aggregate 99% interest
in USRP.
- The Managing General Partner will initially receive 75,285
shares of Common Stock (1% of all shares of Common Stock to be
outstanding immediately
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following the Conversion) on account of the Managing General Partner's
1% interest in USRP.
See "--Allocation of Shares of Common Stock Among Unitholders and the Managing
General Partner."
THE MERGER AGREEMENT. The Merger Alternative will be effected pursuant to
the terms and conditions of the Merger Agreement. A vote in favor of the
Merger Alternative will constitute a vote for approval of the Merger Agreement.
The Merger Agreement, attached as APPENDIX A hereto and incorporated herein by
reference, provides that, subject to the conditions thereof, the REIT
Corporation will indirectly acquire the operations of USRP through the merger
of the REIT Sub into USRP with USRP as the surviving entity and, as a result,
becoming an indirect, wholly-owned subsidiary of the REIT Corporation. As part
of the Conversion, the Managing General Partner will withdraw as managing
general partner of USRP, and pursuant to the terms of the Merger Agreement, a
corporate subsidiary of the REIT Corporation will be substituted as managing
general partner of USRP. The Merger will become effective after all of the
conditions to consummation of the Merger have been satisfied, including the
receipt of a favorable Ruling from the IRS, or on such later date as the
parties may mutually agree, by filing with the Secretary of State of the State
of Delaware a certificate of merger as required by applicable Delaware law. If
the Conversion is approved and effected by the Merger Alternative, it is
anticipated that the Merger will be effective on or prior to September 30,
1997.
The obligations of the parties to effect the Merger are subject to certain
conditions, including (i) the approval and adoption of the Merger Agreement and
the transactions contemplated thereby by the affirmative vote of the holders of
a majority of the outstanding Units as of the Record Date; (ii) no statute,
rule or regulation having been enacted or promulgated by any governmental
authority which prohibits the exchange of Units for Common Stock or
consummation of the Merger; (iii) no order or injunction of a United States or
state court of competent jurisdiction in effect prohibiting the exchange of
Units or consummation of the Merger; (iv) the receipt by USRP of an opinion of
counsel to the effect that the Merger will be treated as part of a transaction
described in Section 351 of the Code; (v) the receipt of a favorable Ruling
from the IRS as to treatment of the Merger as part of a transaction described
in Section 351 of the Code; (vi) the receipt of all permits, qualifications and
other governmental approvals that are required under applicable law in
connection with the Merger and the other transactions contemplated by the
Merger Agreement; (vii) the approval of the Common Stock for listing on the
NYSE upon official notice of issuance; and (viii) the approval of the
amendments to the Partnership Agreements by the affirmative vote of the holders
of a majority of the Units outstanding as of the Record Date. These conditions
may not be waived by USRP.
AMENDMENTS TO PARTNERSHIP AGREEMENTS. In order to effect the Conversion,
whether through the Merger Alternative or the Exchange Alternative, and to
provide greater operating flexibility following the Conversion, certain
amendments are proposed to be made to the Master Partnership Agreement and the
partnership agreement of the Operating Partnership (the "Operating Partnership
Agreement" and, together with the Master Partnership Agreement, the
"Partnership Agreements") to, among other things, provide for the Termination
and to provide the general partner of the Operating Partnership flexibility to
issue different classes of partnership
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interests. A vote in favor of either the Merger Alternative or the Exchange
Alternative will constitute a vote in favor of the amendments to the
Partnership Agreements described below. The proposed amendments to the
Partnership Agreements would:
- Establish a price for the conversion of the Operating
Partnership General Partner Interest for an interest in the Operating
Partnership and/or Units (which conversion shall occur at such time
as the Managing General Partner ceases to be the managing general
partner of the Partnerships, whether by transfer of interest,
withdrawal or removal (other than for "cause"));
- Permit the admission of new limited partners of the Operating
Partnership at the discretion of the managing general partner;
- Provide a mechanism to permit holders of interests in the
Operating Partnership and/or Units to exchange such interests for
shares of Common Stock;
- Permit the issuance of Operating Partnership interests with
terms comparable to shares of preferred stock which may, from time to
time, be issued by the REIT Corporation; and
- Expand the powers of the Partnerships to enable them to
originate loans secured by real estate and to acquire properties not
exclusively used by restaurants.
EXCHANGE ALTERNATIVE
In the event that the Ruling is not obtained from the IRS, the Conversion,
if approved by the Limited Partners, would be effected through the admission of
the REIT Corporation as a limited partner of the Operating Partnership and the
exchange of Units for shares of Common Stock by the Unitholders from time to
time, at their discretion, pursuant to the exchange right to be provided for in
the amended Master Partnership Agreement. The Exchange Alternative will be
implemented only if USRP does not receive a favorable Ruling from the IRS.
If the Conversion is effected pursuant to the Exchange Alternative, the
Unitholders will not be required to exchange the Units for shares of Common
Stock until such time as they want to sell their Units, which exchange right
would only become effective at such time as the Common Stock is listed on the
NYSE and would require such an exchange to take place prior to the sale of the
Units to a third party. Additionally, in order to effect the Exchange
Alternative, each of the other amendments to the Master Partnership Agreement
described above under "--The Merger Alternative--Amendments to the Partnership
Agreements" would become effective. A vote in favor of the Exchange
Alternative will constitute a vote in favor of the amendments to the Master
Partnership Agreement described above.
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TERMINATION OF THE OPERATING PARTNERSHIP GENERAL PARTNER INTEREST
GENERAL
As described above, one of the amendments to the Partnership Agreements
being proposed in order to effect the Conversion is the establishment of the
price (the "Acquisition Price") to be paid to the Managing General Partner in
connection with the conversion of the Operating Partnership General Partner
Interest and the conversion of the USRP Interest. If the Conversion is
effected by the Merger Alternative, the Managing General Partner will withdraw
as managing general partner of the Partnerships effective as of August 31, 1997
(unless extended by the Special Committee in its sole discretion) and, pursuant
to the terms of the Merger Agreement, a corporate subsidiary of the REIT
Corporation will be substituted as managing general partner of the
Partnerships. If the Exchange Alternative is adopted, the Managing General
Partner will withdraw as the managing general partner of the Partnerships
effective as of August 31, 1997 (unless extended by the Special Committee in
its sole discretion) and, pursuant to the terms of the Partnership Agreements,
a corporate subsidiary of the REIT Corporation would be substituted as managing
general partner of the Partnerships. In conjunction with either such
withdrawal, the Managing General Partner will (i) convert the Operating
Partnership General Partner Interest (if the Conversion is effected through the
Merger Alternative) or assign such interest to USRP (if the Conversion is
effected through the Exchange Alternative) pursuant to the terms of the
Partnership Agreements, and (ii) convert the USRP Interest pursuant to the
terms of the Merger Agreement and/or the Master Partnership Agreement, as
applicable, for the Acquisition Price. As a result of the Termination, the
Company will become self-advised.
The Acquisition Price consists of two components: (i) the initial share
consideration (the "Initial Share Consideration") and (ii) the contingent share
consideration (the "Contingent Share Consideration"). The Acquisition Price
consists of two components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being diluted from the
issuance of the Acquisition Shares (as defined below) and to enable the Special
Committee to establish a price to be paid for the Operating Partnership General
Partner Interest and the USRP Interest which cannot be valued with certainty.
The Initial Share Consideration is equal to the value of 850,000 shares of
Common Stock (subject to adjustment in the event of certain dilutive events),
and shall consist of shares of Common Stock, Units and/or an interest in the
Operating Partnership, as applicable, depending upon how the Conversion is
effected (collectively, the "Initial Shares"). The Initial Shares shall be
issued by the REIT Corporation, USRP or the Operating Partnership, as
applicable, as soon as practicable following the date of the Termination, but
in no event later than 30 days thereafter. The Contingent Share Consideration
is equal to the value of up to 550,000 shares of Common Stock (subject to
adjustment in the event of certain dilutive events), and shall consist of Units
and/or an interest in the Operating Partnership, as applicable, depending upon
how the Conversion is effected (collectively, the "Contingent Shares" and,
together with the Initial Shares, the "Acquisition Shares"). The exact number
of Contingent Shares to be issued will be determined by dividing the fees and
distributions (in excess of $3,612,500) which would otherwise have been payable
to the Managing General Partner for fiscal year 2000 pursuant to the Operating
Partnership General Partner Interest and the USRP Interest (less certain
expenses to be incurred by the REIT Corporation following the Termination) by
$4.25. The Managing General Partner will not receive
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any distributions with respect to the Contingent Shares, or otherwise have
any rights with respect thereto, until they are issued. The Contingent
Shares shall be issued by USRP or the Operating Partnership, as applicable,
as soon as practicable following the end of the year 2000, but in no event
later than March 31, 2001.
THE FAIRNESS OPINION
Morgan Keegan is acting as the financial advisor to the Special Committee
in connection with establishing the Acquisition Price and has rendered its
opinion to the Special Committee that the Acquisition Price is fair, from a
financial point of view, to the Unitholders. USRP appointed the Special
Committee to act on behalf of the Unitholders for purposes of evaluating the
Acquisition Price. The full text of Morgan Keegan's opinion is set forth as
APPENDIX B to this Proxy Statement/Prospectus. See "The Conversion--Fairness
Opinion." Morgan Keegan's opinion does not address the fairness of the Merger
Alternative or the Exchange Alternative. See "The Conversion--Fairness Opinion-
- -Scope of Opinion."
ANALYSIS OF ALTERNATIVES CONSIDERED
CONTINUATION OF USRP
In reaching its decision to recommend the Conversion, the Board of
Directors considered the alternative of continuing USRP in its current form as
a master limited partnership. The Board of Directors determined, however,
that, based on the reasons discussed above under "--Advantages of the
Conversion," proceeding with the Conversion would be more beneficial to the
Unitholders than the alternative of continuing USRP in its existing form. The
Managing General Partner believes these advantages outweigh the disadvantages
discussed under the caption "--Disadvantages of the Conversion" above. See
"The Conversion--Analysis of Alternatives Considered."
LIQUIDATION OF USRP
With respect to the alternative of liquidating USRP, the Board of
Directors concluded that, based on the estimated liquidation value per Unit
($20.00) such alternative was less favorable to the Unitholders than the
receipt of shares of Common Stock, assuming the Common Stock trades at a price
per share comparable to the current trading price per Unit ($28.50 at April 25,
1997), although no assurance can be given that such trading price will result.
The "Risk Factors--Substitution of Trading of Common Stock for Units" and the
"The Conversion--Comparison of Values."
ALLOCATION OF SHARES OF COMMON STOCK AMONG UNITHOLDERS AND THE MANAGING GENERAL
PARTNER
The Board of Directors determined, based on the fact that the REIT
Corporation will initially own the same assets as those held by USRP through
its ownership interest in the Operating Partnership, that it was appropriate
for each of the Unitholders to receive one share of Common Stock for each Unit
held by them immediately prior to the Conversion (or 7,012,585
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shares of Common Stock on account of their 99% percentage interest in USRP).
Based on this analysis, the Board of Directors concluded that the Managing
General Partner should receive 70,834 shares of Common Stock (if the
Conversion is effected through the Merger Alternative) and 1% of the
outstanding Units immediately following the Conversion (if effected through
the Exchange Alternative).
In order to determine the number of shares of Common Stock (or the
equivalent interest in the Operating Partnership equivalent number of Units) to
be issued to the Managing General Partner in connection with the conversion of
its Operating Partnership General Partner Interest, the Board of Directors
established the Special Committee to negotiate on behalf of the Unitholders the
Acquisition Price. The Managing General Partner determined that a special
committee was necessary due to the potential conflict of interest between
management of the Managing General Partner and the Unitholders in determining
the Acquisition Price. See "Risk Factors--Conflicts of Interest" and "The
Conversion--Analysis of the Special Committee."
NO DISSENTERS' APPRAISAL RIGHTS
Unitholders who object to the Conversion will have no dissenters'
appraisal rights (I.E., the right, instead of receiving Common Stock, to seek a
judicial determination of the "fair value" of their Units and to compel USRP to
purchase Units for cash in that amount) under state law or the Master
Partnership Agreement, nor will such rights be voluntarily accorded to the
Unitholders by the Company. Thus, approval of the Conversion by the holders of
a majority of all Units outstanding on the Record Date will bind all
Unitholders, and objecting Unitholders will have no alternative to receipt of
Common Stock other than selling their Units in the market. The Units are
currently listed on the NYSE under the ticker symbol "USV." If the Conversion
is effected by the Merger Alternative, the Common Stock is expected to be
listed on the NYSE effective at the time the Merger is consummated. If the
Conversion is effected through the Exchange Alternative, the Common Stock is
expected to be listed on the NYSE shortly after consummation of the Conversion.
See "The Conversion--No Dissenters' Appraisal Rights."
TAX CONSEQUENCES OF THE CONVERSION
TAX CONSEQUENCES OF THE MERGER ALTERNATIVE
Although pursuant to the Merger, USRP will be the surviving entity (and
become a subsidiary of the REIT Corporation), for federal income tax purposes
USRP will be deemed to have been terminated in the Merger. For federal income
tax purposes, the Merger will generally be tax-free to USRP and the Unitholders
under Sections 351 and 731 of the Code except to the extent (if any) that
USRP's aggregate tax basis in its assets is less than the liabilities assumed
by the REIT Corporation in the Merger. It is expected that the USRP's
aggregate tax basis in its assets will exceed the sum of such liabilities, so
that USRP itself should not recognize gain upon the Merger. However,
Unitholders whose adjusted basis in their Units or in partnership property is
less than their share of USRP's nonrecourse indebtedness will recognize gain to
the extent of such difference.
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It is a condition precedent to consummation of the Merger that the IRS
issue a favorable Ruling as to treatment of the Merger as part of a transaction
described in Section 351 of the Code. The Ruling, however, is conditioned upon
the accuracy of certain factual assumptions and representations. If the IRS
should subsequently determine that the assumptions or representations were
materially inaccurate, the IRS would not be bound by the Ruling and might
challenge the nonrecognition treatment of the Merger in whole or in part.
There can be no assurance that any such challenge could be successfully
resisted by USRP. If the Merger should fail to qualify as tax-free under
Section 351, each Unitholder could be required to recognize gain or loss equal
to the difference between the sum of the value of the Common Stock received by
the Unitholder plus the Unitholder's share of partnership liabilities and the
Unitholder's share of USRP's tax basis in the property at the time of the
Merger. Any losses previously allocated by USRP to a Unitholder that have not
been used because of the at-risk, basis or passive activity limitations can be
used to offset gain recognized on the Merger. Unitholders should consult their
own tax advisors to determine whether they will recognize gain in the Merger.
See "Federal Income Tax Considerations--The Merger Alternative."
REIT STATUS
A qualified REIT is not subject to federal income tax if its dividends
paid to stockholders for each year equal or exceed the sum of the REIT's
adjusted ordinary taxable income plus its capital gains, because the REIT is
allowed a deduction for such dividends paid. The dividends are includable in
the income of a REIT's stockholders. If a REIT should fail to qualify as a
REIT for any year, or should fail to pay sufficient dividends, the REIT could
be required to pay federal income or excise taxes, thereby reducing the cash
available for distribution to its stockholders.
The REIT Corporation intends to operate in a manner that will enable it to
qualify as a REIT under the Code commencing with the taxable year in which the
Merger is consummated. Although the Managing General Partner believes that the
REIT Corporation will be so organized and will so operate and that it initially
will qualify as a REIT, no assurance can be given that the REIT Corporation in
fact will qualify or remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions and
Treasury Regulations for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances not entirely within the REIT Corporation's control may affect
its ability to qualify as a REIT. Moreover, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions
will not significantly alter the tax laws regarding qualification as a REIT or
the federal income tax consequences of such qualification. USRP is not aware
of any current facts or circumstances that would generate a change in such tax
laws so as to significantly and adversely affect the REIT Corporation's ability
to qualify or operate as a REIT.
If in any taxable year the REIT Corporation were to fail to qualify as a
REIT, the REIT Corporation would be subject to federal income tax at regular
corporate rates on its taxable income, calculated without any deduction for
dividends paid to stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the REIT Corporation would be disqualified from
treatment as a REIT for the four taxable years following the year in which such
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<PAGE>
qualification was lost. Even if the REIT Corporation subsequently requalified
as a REIT, it might be required to make distributions at that time equal to any
earnings accumulated during the period of non-REIT status and to pay a full
corporate-level tax on any unrealized gain in its assets as of the date of
requalification ("built-in gain").
Any taxes payable by the REIT Corporation would reduce the funds available
for distribution to stockholders for each of the years involved. During the
period in which the REIT Corporation had lost its REIT status, the REIT
Corporation would no longer be required by the Code to make any distributions
to stockholders. Although the REIT Corporation currently intends to operate in
a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the REIT Board to revoke
the election for the REIT Corporation to qualify as a REIT. See "Federal
Income Tax Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Failure to Qualify."
CERTAIN TAXES IMPOSED ON A REIT
If the REIT Corporation qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
currently distributed to its stockholders. However, the REIT Corporation will
be subject to federal income or excise taxes at various rates on the following:
(i) undistributed REIT taxable income, including net capital gains; (ii)
"alternative minimum taxable income" (under certain circumstances); (iii) net
income from the sale or other disposition of "foreclosure property," or other
nonqualifying income from "foreclosure property;" (iv) net income from
"prohibited transactions;" (v) net income attributable to the greater of the
amount by which the REIT Corporation fails the 75% or 95% gross income tests if
the REIT Corporation maintains its qualification as a REIT; (vi) the excess of
required distributions over the amounts actually distributed; and (vii)
"built-in gain" recognized on the disposition of an asset during the 10-year
period following acquisition by the REIT Corporation of the asset from a C
corporation in a carryover-basis transaction. See "Federal Income Tax
Considerations--The Merger Alternative-- Tax Consequences of the REIT
Corporation's Qualification as a REIT--Taxation of the REIT Corporation as a
REIT."
DISTRIBUTION REQUIREMENTS
In order to obtain the favorable tax treatment associated with REITs
qualifying under the Code, the REIT Corporation generally will be required each
year to distribute to its stockholders at least 95% of its otherwise taxable
income (after certain adjustments). In addition, the REIT Corporation will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any taxable year are less than
the sum of 85% of its ordinary income plus 95% of its capital gain net income
for the taxable year. The REIT Corporation intends to make timely
distributions to stockholders in amounts sufficient to satisfy the annual
distribution requirements in order to qualify as a REIT and to avoid liability
for federal income or excise taxes. The REIT Corporation may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at REIT taxable income. In addition, the REIT Corporation
may recognize net capital gain in excess of the cash received
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<PAGE>
in connection with the sale of property subject to indebtedness. In such
cases, the REIT Corporation may have less cash available for distribution
than is necessary to meet the annual distribution requirements, and in order
to meet such requirements, the REIT Corporation may arrange for short-term
(or possibly long-term) borrowings or pay distributions in the form of
taxable stock dividends. Furthermore, under certain circumstances, the REIT
Corporation may be able to rectify a failure to meet the distribution
requirements by paying "deficiency dividends" to stockholders in a later year
which would be included in the REIT Corporation's deduction for dividends
paid for the earlier year. See "Federal Income Tax Considerations--The Merger
Alternative--Tax Consequences of the REIT Corporation's Qualification as a
REIT--Taxation of the REIT Corporation as a REIT."
TAX CONSEQUENCES OF THE EXCHANGE ALTERNATIVE
If the Conversion is effected pursuant to the Exchange Alternative, no
gain or loss should be recognized by the Unitholders as a result of the
amendments to the Partnership Agreements and the admission of the REIT
Corporation as a limited partner of the Operating Partnership. A Unitholder's
eventual exchange of Units for shares in the REIT Corporation will be a taxable
event; however, no exchange of Units will be required if the Conversion is
effected pursuant to the Exchange Alternative until such time as the Unitholder
wishes to sell its Units. See "Federal Income Tax Considerations--The Exchange
Alternative--Disposition of Units; Exchange for Shares in the REIT
Corporation." Prior to such exchange, the Unitholders generally will continue
to be taxed in the same manner as they were taxed preceding the admission of
the REIT Corporation into the Operating Partnership.
SUMMARY OF COMPARISON OF TAXATION OF STOCKHOLDERS AND UNITHOLDERS
TAXATION OF STOCKHOLDERS
The following discussion assumes that the REIT Corporation qualifies as a
REIT for federal income tax purposes. See generally "Federal Income Tax
Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Taxation of Stockholders."
Generally, distributions to stockholders of the REIT Corporation will be
taxable as ordinary income up to the amount of the REIT Corporation's current
or accumulated earnings and profits. Distributions in excess of the REIT
Corporation's current or accumulated earnings and profits will be treated first
as a tax-free return of capital; distributions in excess of a stockholder's tax
basis in its Common Stock will be taxable as gain realized from the sale of
such Common Stock. Dividends that are properly designated by the REIT
Corporation as capital gain dividends will be treated generally as long-term
capital gains for the taxable year (to the extent they do not exceed the REIT
Corporation's actual net capital gain). In contrast with partners in a
partnership as described below, the stockholders will not recognize income in
excess of the fair market value of any property (including money) distributed
by the REIT Corporation.
Distributions by a REIT in excess of its taxable income may result in
immediate recognition of taxable gain to a stockholder whose tax basis has been
reduced to zero, whereas
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<PAGE>
any gain attributable to such distributions by USRP may generally be deferred
until the sale of property or the Unitholder's Units.
Stockholders may not deduct on their income tax returns any net operating
losses or net capital losses of the REIT Corporation. Any such losses may,
however, be carried forward by the REIT Corporation and used to reduce the REIT
Corporation's taxable income, capital gains and the amount that the REIT
Corporation will be required to distribute in order to remain qualified as a
REIT.
A transferee Unitholder is entitled to the benefit of certain basis
adjustments under Section 754 of the Code upon a sale or exchange of Units or
the death of a Unitholder. There will be no Section 754 adjustments upon the
sale or exchange of Common Stock or the death of a stockholder of the REIT
Corporation. Basis adjustments attributable to Unitholders will become part of
the REIT Corporation's basis for its assets at the time of the Merger.
Unitholders who would have been entitled to additional depreciation deductions
attributable to such adjustments will no longer be able to utilize such
deductions to reduce their share of annual income from the property. The REIT
Corporation's depreciation deductions (including those attributable to the
special basis adjustments of former Unitholders) will be allocated ratably
among the stockholders in determining the portion of the REIT Corporation's
distributions that will be taxable as ordinary dividends. As a result, for
each year following the Merger, Unitholders with significant positive Section
754 adjustments (generally those who purchased their Units at higher prices and
on more recent dates) will generally recognize somewhat greater amounts of
taxable income than if the Merger had not occurred. Upon a sale of property,
the capital gain will similarly be calculated uniformly by the REIT
Corporation, resulting in greater capital gain dividends for stockholders who
had significant positive Section 754 adjustments and smaller capital gain
dividends for stockholders who had negative or less significant positive
Section 754 adjustments (or would have had such adjustments if the Merger had
not been consummated) than if property were to have been sold by USRP without
the Merger. No consideration has been given to the impact on particular
Unitholders described above in arriving at the number of shares of Common Stock
to be received by each Unitholder. See "Federal Income Tax Considerations--The
Exchange Alternative--Tax Treatment of Operations--Section 754 Election."
The REIT Corporation is required to demand of its stockholders who own of
record 5% or more of the Common Stock (assuming there are more than 2,000
stockholders of record) information respecting the Common Stock actually or
constructively owned by such stockholders. The REIT Corporation is required to
maintain a list of those stockholders who fail to comply, and noncomplying
stockholders are required to include the required information in their tax
returns. See "Federal Income Tax Considerations--The Merger Alternative--Tax
Consequences of the REIT Corporation's Qualification as a REIT--Share
Ownership; Reporting."
TAXATION OF UNITHOLDERS
The following discussion summarizes the taxation of Unitholders as
partners in USRP. See generally, "Federal Income Tax Considerations--The
Exchange Alternative."
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<PAGE>
Unitholders are subject to tax based on their distributive share of the
income, gain, loss, deductions and credits of USRP, regardless of whether USRP
distributes any cash or property to the Unitholders during the taxable year. A
Unitholder may, therefore, realize taxable income in excess of cash
distributions. For example, a Unitholder may realize taxable income in excess
of cash distributions if (i) USRP retains cash in excess of depreciation and
original issue discount deductions to repay loans made to USRP or to make other
nondeductible expenditures, (ii) Units are transferred, (iii) property is sold,
or (iv) a Unitholder's share of USRP's indebtedness decreases reducing the
Unitholder's adjusted tax basis in its Units below zero. A Unitholder
generally is entitled to deduct its distributive share of partnership losses,
if any, only to the extent permitted by the basis, at-risk and passive activity
loss limitations.
USRP elected under Section 754 of the Code to adjust the basis of
partnership property upon certain transfers of Units so that the transferee
Unitholder's proportionate share of the adjusted basis of partnership property
equals his basis in his Units. As a result, a transferee Unitholder who
purchases a Unit at a price greater than the transferor's share of USRP's basis
in partnership property will recognize in most circumstances less taxable
income (or more loss) upon the sale of partnership property than if the
election were not in effect. On the other hand, a transferee Unitholder who
purchased a Unit at a cost less than the transferor's share of USRP's basis in
its property will recognize, in most circumstances, more income (or less loss)
upon the sale of partnership property than if the election were not in effect.
The election also has an impact on the amount of depreciation deductions
allocated to a transferee Unitholder. A similar election is not available to a
REIT. See "--Taxation of Stockholders" above.
EFFECTS OF THE CONVERSION ON RIGHTS OF UNITHOLDERS
As a result of the Conversion, Unitholders will become stockholders of the
REIT Corporation. The REIT Corporation is a Maryland corporation, while USRP
is a Delaware limited partnership. For a summary comparison of the material
differences between the corporate law of the State of Maryland and the
partnership law of the State of Delaware, see "Comparative Rights of
Unitholders and Stockholders."
COMPARISON OF RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
The following table summarizes certain rights of Unitholders currently as
compared to the rights of stockholders if the Conversion is approved. For a
more detailed description, see "Comparative Rights of Unitholders and
Stockholders."
<TABLE>
UNITHOLDERS STOCKHOLDERS
----------- ------------
<S> <C> <C>
Right to Elect No right to elect directors of Vote to elect directors.
Management managing general partner.
Right to 80% of Unitholders must vote to Two-thirds vote of stockholders is
Remove remove managing general partner required to remove members of the
Management without cause (a majority with cause). Board of Directors, provided that
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<PAGE>
cause exists.
UNITHOLDERS STOCKHOLDERS
----------- ------------
General In addition to approval of certain Stockholder approval is required for
Voting Rights fundamental actions, Unitholder (i) election or removal of directors;
Regarding approval is required to amend the (ii) with certain exceptions,
Governance Partnership Agreements to effect amendment of the Articles of
a change in the investment policies Incorporation; (iii) termination of
of USRP and for certain financial the REIT Corporation's existence;
and investment decisions, (iv) reorganization of the REIT
including (i) sale of all or Corporation; and (v) merger,
substantially all of the assets consolidation or share exchange
and (ii) merger or consolidation of the REIT Corporation, or the
of USRP or the Operating sale or disposition of substantially
Partnership. all of the REIT Corporation's
assets. The REIT Board has
the exclusive authority to alter the
investment policies of the REIT
Corporation at any time.
Dissolution Requires consent of a majority of all Requires approval of two-thirds of
Unitholders. stockholders.
Liquidation Unitholders share ratably in Stockholders share ratably in any
Rights accordance with percentage interests. assets remaining after satisfaction
of obligations to creditors and any
liquidation preferences of preferred
stock.
</TABLE>
These substantive and procedural differences affect the rights of
Unitholders and holders of Common Stock. Specifically, as described in the
table above, the REIT Corporation's policies with respect to investments,
financings, affiliate transactions and certain other activities may be amended
or revised from time to time at the discretion of the REIT Board. As a result,
although no such change is currently contemplated, the investment policies of
the REIT Corporation may be altered so that the Company no longer invests in
restaurant properties. In addition, a two-thirds vote of stockholders is
required to remove members of the Board of Directors, provided that cause
exists, whereas a majority of Unitholders may remove the managing general
partner for cause. Therefore, a greater vote will be required to change
management of the Company following the Conversion.
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MARKET PRICES OF UNITS AND DISTRIBUTIONS
The Units are listed for trading on the NYSE under the ticker symbol
"USV." The following table sets forth, for the periods indicated, the closing
sale price of the Units as reported on the NYSE in such periods and the cash
dividends declared in such periods (and paid in the subsequent period). As of
April 25, 1997, the record number of Unitholders was 1,785.
<TABLE>
1994 HIGH LOW DISTRIBUTION
---- ---- --- ------------
<S> <C> <C> <C>
1st quarter $16 3/4 $15 7/8 $ .39
2nd quarter 17 1/4 15 3/8 .39
3rd quarter 17 1/2 16 3/4 .41
4th quarter 17 3/8 13 .42
-----
$1.61
-----
-----
1995 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $16 1/2 $14 1/4 $ .42
2nd quarter 17 1/8 15 3/4 .42
3rd quarter 18 7/8 16 3/4 .43
4th quarter 20 1/4 18 .44
-----
$1.71
-----
-----
1996 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $23 3/8 $19 1/2 $ .47
2nd quarter 25 21 1/8 .48
3rd quarter 25 3/8 21 1/2 .485
4th quarter 28 1/4 22 5/8 .50
------
$1.935
------
------
1996 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $30 3/4 $27 $ .50
2nd quarter (through April 25, 1997) $28 1/2 $26 1/2 $ -
</TABLE>
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<PAGE>
RISK FACTORS
LIMITED PARTNERS SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, THE MATTERS DESCRIBED
BELOW IN DETERMINING WHETHER TO VOTE FOR THE CONVERSION.
CONFLICTS OF INTEREST
The Partnership Agreements require the Operating Partnership to pay fixed
and percentage fees annually to the Managing General Partner relating to the
properties owned and acquired by the Partnership. In connection with the
Termination, the Managing General Partner will be issued the Acquisition Shares
designed to compensate it for the conversion of the Operating Partnership
General Partner Interest and the conversion of the USRP Interest based on the
Acquisition Price. The Limited Partners should be aware that a majority of the
members of the Board of Directors, by virtue of their ownership interests in
and/or positions or affiliations with the Managing General Partner, were
subject to a conflict of interest in determining the Acquisition Price. See
"The Conversion--Termination of the Operating Partnership General Partner
Interest."
The Board of Directors appointed the Special Committee to negotiate on
behalf of the Unitholders the Acquisition Price. Neither member of the Special
Committee is an affiliate of, or otherwise has any economic interest in, the
Managing General Partner or its affiliates. The Board of Directors does not
believe that the intention of the members of the Special Committee to serve as
directors of the REIT Corporation following the Conversion resulted in a
material conflict of interest.
In addition, the Special Committee retained Morgan Keegan to review the
Acquisition Price and to provide an opinion that the Acquisition Price is fair,
from a financial point of view, to the Unitholders. Morgan Keegan was selected
to provide this service based upon Morgan Keegan's qualifications, expertise
and reputation as an investment bank and as a professional in the securities
industry. Morgan Keegan delivered an opinion to the Special Committee that as
of the date hereof the Acquisition Price was fair, from a financial point of
view, to the Unitholders. No limitations were placed on Morgan Keegan by the
Special Committee or other parties to the Conversion with respect to the
investigations made or the procedures followed by Morgan Keegan in rendering
its opinion. See "The Conversion--Fairness Opinion."
BENEFITS TO MANAGING GENERAL PARTNER/MANAGEMENT
The Conversion will result in certain benefits to the Managing General
Partner and its affiliates. In particular, as a result of the Termination, the
Managing General Partner will receive the Acquisition Price, consisting of
shares of Common Stock, Units and/or an interest in the Operating Partnership.
Receipt of the Acquisition Price enables the Managing General Partner to
immediately realize the present value of the projected payments otherwise
payable to it over a period of years pursuant to the Operating Partnership
General Partner Interest. The Acquisition Price consists of (i) the 850,000
Initial Shares which would have a value of $24,225,000 assuming the market
price of an Initial Share (which could be a share of Common Stock, a Unit
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<PAGE>
or an interest in the Operating Partnership) at the time of its issuance is
comparable to the market price of a Unit ($28.50 at April 25, 1997) and (ii)
up to 550,000 Contingent Shares which would have a value of up to
$15,675,000) assuming the market price of a Contingent Share (which could be
a Unit or an interest in the Operating Partnership) at the time of its
issuance is comparable to the market price of a Unit ($28.50 at April 25,
1997). Additionally, each of Messrs. Stetson and Margolin will be employed by
the REIT Corporation for compensation commencing at $250,000 per year and
will be eligible to receive annual incentive bonuses and stock options.
MATERIAL DIFFERENCES IN RIGHTS OF THE UNITS AND COMMON STOCK
There are certain material differences between the rights of holders of
the Units and holders of shares of Common Stock which arise generally because
of the differences between laws governing limited partnerships and laws
governing corporations, as well as from their respective governing instruments.
These differences relate to, among other matters, management, voting rights and
the right to compel dissolution. For instance, holders of shares of Common
Stock have the right to elect the directors of the REIT Corporation, whereas
holders of Units do not elect those persons who manage USRP. However certain
matters that require the approval of the Limited Partners do not require the
approval of stockholders, including, the powers of USRP and the managing
general partner. Specifically, the REIT Corporation's policies with respect to
investments, financings, affiliate transactions and certain other activities
may be amended or revised from time to time at the discretion of the REIT Board
without a vote of the stockholders of the REIT Corporation, while any such
change in investment policy by USRP would necessitate amending the Master
Partnership Agreement requiring a vote of Limited Partners. As a result,
although no such change is currently contemplated, the investment policies of
the REIT Corporation could be altered so that the Company no longer invests in
restaurant properties. In addition, a two-thirds vote of stockholders is
required to remove members of the Board of Directors, provided that cause
exists, whereas a majority of Unitholders may remove the managing general
partner for cause. Therefore, a greater vote will be required to change
management of the Company following the Conversion. See "Comparative Rights of
Unitholders and Stockholders."
ABSENCE OF APPRAISAL RIGHTS
Under applicable law and the Master Partnership Agreement, Unitholders
will have no dissenters' appraisal rights or other similar rights in connection
with the Conversion, nor will such rights be voluntarily accorded to the
Unitholders by the Company. Consequently, all Unitholders will be bound by the
vote of Unitholders owning a majority of the outstanding Units. Unitholders
who do not wish to own Common Stock must either sell their Units prior to the
consummation of the Merger or sell their Common Stock subsequent thereto. See
"The Conversion--No Dissenters' Appraisal Rights."
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<PAGE>
SUBSTITUTION OF TRADING OF COMMON STOCK FOR UNITS
The Common Stock is expected to be approved for listing on the NYSE.
There can be no assurance given, however, that the market price of the Common
Stock will initially or thereafter equal the market price of the Units. As a
result, the value of the stockholders' investment in the Company following the
Conversion could be lower than the value of their investment in USRP prior to
the Conversion.
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP LIMITS ON CHANGE IN
CONTROL
CHARTER PROVISIONS
Certain provisions of the Articles more fully described below may have the
effect of discouraging a third party from making an acquisition proposal for
the Company and may thereby inhibit a change in control of the Company under
circumstances that could give the holders of shares of Common Stock the
opportunity to realize a premium over the then-prevailing market prices.
Furthermore, the ability of the stockholders to effect a change in management
control of the REIT Corporation could be substantially impeded by such
antitakeover provisions. Moreover, in order for the REIT Corporation to
maintain its qualification as a REIT, not more than 50% in value of its
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities).
For the purpose of preserving the REIT Corporation's REIT qualification, the
Articles prohibit ownership either directly or under the applicable attribution
rules of the Code of more than 8.75% of the shares of Common Stock by any
stockholder, subject to certain exceptions. Such ownership limit may have the
effect of preventing an acquisition of control of the Company without the
approval of the REIT Board. See "Description of Capital Stock," "Certain
Provisions of Maryland Law and of the REIT Corporation's Articles and Bylaws"
and "Federal Income Tax Considerations."
STAGGERED BOARD
The REIT Board will be divided into three classes. The terms of the
first, second and third classes will expire in 1998, 1999 and 2000,
respectively. Directors of each class will be elected for a three-year term
upon the expiration of the current class's term. The staggered terms for
directors may affect the stockholders' ability to effect a change in control of
the REIT Corporation even if a change in control were in the stockholders' best
interests. See "Certain Provisions of Maryland Law and of the REIT
Corporation's Articles and Bylaws."
PREFERRED STOCK
The Articles authorize the REIT Board to issue up to 10 million shares of
preferred stock, par value $.001 per share (the "Preferred Stock"), and to
establish the preferences and rights, including the right to elect additional
directors under terms specified in the preferred stock preferences, of any such
shares issued. See "Description of Capital Stock--Preferred Stock." The
issuance of Preferred Stock could have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
stockholders' best interests. The rights, if any, of the holders of any series
of Preferred Stock to elect additional directors under
39
<PAGE>
specified circumstances could have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
stockholders' best interests. No shares of Preferred Stock will be issued or
outstanding upon consummation of the Conversion.
MEETINGS OF STOCKHOLDERS
Stockholders of the REIT Corporation may call a special meeting only upon
the written request of 25% or more of the outstanding voting stock. The delay
or prevention of a special meeting of stockholders that could result from such
a requirement could have the effect of delaying or preventing a change control
of the Company even if a change in control were in the stockholders' best
interests.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law (the "MGCL"), certain business
combinations (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an "Interested Stockholder" are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. An Interested Stockholder is any
person who beneficially owns 10% or more of the voting power of the
then-outstanding voting stock of the corporation or an affiliate of such
person. Thereafter, such business combination must be recommended by the board
of directors of such corporation and approved by a super-majority vote of the
corporation's stockholders. The business combination provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Bylaws of the REIT
Corporation contain a provision exempting from these provisions of the MGCL any
business combination involving QSV (or its affiliates) or any person acting in
concert as a group with any of the foregoing persons. See "Certain Provisions
of Maryland Law and of the REIT Corporation's Articles and Bylaws--Business
Combinations."
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquirer, by officers or by
directors who are employees of the corporation. "Control Shares" are voting
shares of stock, which if aggregated with all other shares of common stock
previously acquired by such person, or in respect of which such person is able
to exercise or direct the exercise of voting power, would entitle the acquirer
to exercise voting power in electing directors within certain ranges of voting
power (from one-fifth to a majority). A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. A person who has
made or proposes to make a control share acquisition, upon satisfaction of
certain conditions, may compel the board of directors to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. The corporation may, subject to certain conditions and
limitations, redeem any or all of the control shares for fair value if voting
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<PAGE>
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the MGCL. If voting
rights for control shares are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The control share
acquisition statute does not apply to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation. See "Certain Provisions of Maryland Law and of the REIT
Corporation's Articles and Bylaws--Control Share Acquisitions."
RESTRICTIONS ON TRANSFER
The ownership limit provided in the Articles may restrict the transfer of
Common Stock or Preferred Stock. For example, if any purported transfer of
Common Stock or Preferred Stock would (i) result in any person owning, directly
or indirectly, (a) Common Stock in excess of 8.75% of the number of outstanding
shares of Common Stock (except for QSV which initially may own no more than
15.0% of the number of such outstanding shares) or (b) 9.8% of the number of
outstanding shares of Preferred Stock of any series of Preferred Stock, (ii)
result in the Common Stock and Preferred Stock being owned by fewer than 100
persons, (iii) result in the REIT Corporation being "closely held" (as defined
in the Code), or (iv) cause the REIT Corporation to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the REIT
Corporation's or the Operating Partnership's real property, the Common Stock or
Preferred Stock will be designated as "Excess Stock" and transferred
automatically to a trust effective on the day before the purported transfer of
such Common Stock or Preferred Stock. See "Description of Capital Stock--
Restrictions on Transfer."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The REIT Corporation intends to operate so as to qualify as a REIT under
the Code. Although the REIT Corporation believes it has been and will continue
to be organized and operated in such a manner, no assurance can be given that
the REIT Corporation will qualify or remain qualified as a REIT. Qualification
as a REIT involves the application of highly technical and complex Code
provisions for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and
circumstances not entirely within the REIT Corporation's control may affect the
REIT Corporation's ability to qualify as a REIT. For example, in order to
qualify as a REIT, at least 95% of the REIT Corporation's gross income in any
year must be derived from qualifying sources and the REIT Corporation must pay
dividends to stockholders aggregating annually at least 95% of its REIT taxable
income (excluding net capital gains). Further, no assurance can be given that
new legislation, regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. The REIT
Corporation, however, is not aware of any pending tax legislation that would
adversely affect the REIT Corporation's ability to operate as a REIT.
If in any taxable year the REIT Corporation were to fail to qualify as a
REIT, the REIT Corporation would not be allowed a deduction for dividends to
stockholders in computing its taxable income and would be subject to federal
income tax (including any applicable alternative
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minimum tax) on its taxable income at corporate rates. Unless entitled to
relief under certain statutory provisions, the REIT Corporation also would be
disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. As a result, the funds
available for distribution to the REIT Corporation's stockholders would be
reduced for each of the years involved. In addition, dividends would no
longer be required to be paid. To the extent that dividends to stockholders
would have been paid in anticipation of the REIT Corporation's qualification
as a REIT, the REIT Corporation might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. Although the
REIT Corporation currently intends to operate in a manner designed to qualify
as a REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the REIT Board to revoke the REIT election. See
"Federal Income Tax Considerations--The Merger Alternative--Tax Consequences
of the REIT Corporation's Qualification as a REIT."
FUTURE DILUTION
Because the REIT Corporation plans to issue additional shares of Common
Stock after the Conversion to facilitate the Company's ongoing growth strategy,
the holders of Common Stock will experience dilution in their percentage
interest in the Company, generally without any requirement of stockholder
approval. See "Description of Capital Stock."
ACQUISITION AND EXPANSION RISKS
FAILURE TO ACQUIRE ACQUISITION PROPERTIES
As of April 17, 1997, the Company had 119 Acquisition Properties under
binding agreements of acquisition. In connection with the execution of such
agreements, the Company made deposits of approximately $589,834 which may be
non-refundable in whole or in part if the Company elects not to close some or
all of such acquisitions. In addition, should some or all of these Acquisition
Properties not be acquired, consummation of the Termination and the issuance of
the Initial Shares will result in less cash available for distribution to
Unitholders or holders of Common Stock, as the case may be, on a per Unit or
per share basis, following the Conversion until $44 million of additional
properties are acquired. No assurance can be given that additional properties
meeting the Company's acquisition criteria will be available or, if available,
could be acquired by the Company.
RISK OF FAILURE TO REFINANCE EXISTING INDEBTEDNESS
Currently, the Company's borrowings do not have long-term maturities and
as a result, the Company will be required to refinance such borrowings prior to
the maturities of the lease terms of its properties. Refinancing will depend
upon the creditworthiness of the Company and the availability of financing
under market conditions at the time such refinancing is required. Such
refinancing of the Company's borrowings could result in higher interest costs
and adversely affect results from operations. Payment of the interest on, or
amortization of, any such indebtedness could also decrease the cash
distributable to stockholders and partners, if any, if the financing and other
costs of the Company's growth strategy exceed any incremental revenue
generated.
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NO LIMITATION ON INCURRENCE OF DEBT
In order to fund the Company's growth strategy, the Company may borrow
funds and grant liens on its properties to secure such indebtedness. If the
Company were unable to repay or otherwise default in respect of any
indebtedness, the Company's properties could become subject to foreclosure.
The Company's charter documents do not restrict the amount of such
indebtedness, and the extent of the Company's indebtedness from time to time
may affect its interest costs, results of operations and its ability to respond
to future business adversities and changing economic conditions. The Company
has implemented a non-binding policy to maintain a ratio of total indebtedness
of 50% or less to the greater of total market capitalization or the original
cost of all of the Company's properties as of the date of such calculation.
Because it is anticipated that the Company will not fix all of its interest
costs for the long term, future changes in interest rates may positively or
negatively affect the Company.
RISKS THAT THE CORPORATION MAY NOT BE ABLE TO MANAGE EXPANDED PORTFOLIO
At March 31, 1995, the Company owned and managed fewer than 125
Properties. As of April 17, 1997, the Properties consisted of 366 restaurant
properties. As a result of the rapid growth of the Company's portfolio and the
anticipated additional growth, there can be no assurance that the Company will
be able to adapt its management, administrative, accounting and operational
systems to respond to the growth represented by the Acquisition Properties or
any future growth. In addition, there can be no assurance that the Company
will be able to maintain its current rate of growth or negotiate and acquire
any acceptable properties in the future. A larger portfolio of properties
could entail additional operating expenses that would be payable by the
Company. Such acquisitions may also require loans to prospective tenants.
Making loans to existing or prospective tenants involves credit risks and could
subject the Company to regulation under various federal and state laws. Any
operation of restaurants, even on an interim basis, would also subject the
Company to operating risks (such as uncertainties associated with labor and
food costs), which may be significant.
NO RESTRICTIONS ON CHANGES IN INVESTMENT, FINANCING AND OTHER POLICIES
The investment and financing policies of the Company, and its policies
with respect to all other activities, including its growth, debt,
capitalization, dividends and operating policies, will be determined by the
REIT Board. Although the REIT Board has no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of the REIT Board without a vote of the stockholders or partners, if
any, of the Company. A change in these policies could adversely affect the
Company's financial condition or results of operations or the market price of
the Common Stock. See "Policies With Respect to Certain Activities."
ADVERSE EFFECT OF INCREASES IN INTEREST RATES
One of the factors that may influence the market price of the Common Stock
is the annual yield from distributions made by the Company on the Common Stock
as compared to yields on certain financial instruments. Thus, a general
increase in market interest rates could result in
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higher yields on certain financial instruments which could adversely affect
the market price for the Common Stock, since alternative investment vehicles
may be more attractive.
POSSIBLE ADVERSE TAX CONSEQUENCES OF THE CONVERSION
RISK THAT IRS WITHDRAWS RULING
The implementation of the Merger Alternative is conditioned on the
issuance by the IRS of a favorable Ruling as to treatment of the Merger as part
of a transaction described in Section 351 of the Code. The Ruling, however,
will be conditioned upon the accuracy of certain factual assumptions and
representations. If the IRS should subsequently determine that the assumptions
or representations were materially inaccurate, the IRS would not be bound by
the ruling and might challenge the nonrecognition treatment of the Merger in
whole or in part. There can be no assurance that any such challenge could be
successfully resisted by USRP. If the Merger should fail to qualify as
tax-free under Section 351, each Unitholder could be required to recognize gain
or loss equal to the excess, if any, of the sum of the value of the Common
Stock received by the Unitholder plus the Unitholder's share of partnership
liabilities over the Unitholder's share of USRP's tax basis in its assets at
the time of the Merger. Unitholders should consult their own tax advisors to
determine whether they will recognize gain in the Merger. See "Federal Income
Tax Considerations--The Merger Alternative--Qualification as Nonrecognition
Transaction."
RISK OF LOSS OF PARTNERSHIP STATUS
If the Conversion is effected pursuant to the Exchange Alternative, the
continued availability to a Unitholder of the federal income tax benefits of an
investment in USRP depends in large part on the classification of the
Partnerships as partnerships for federal income tax purposes. No ruling from
the IRS as to such status has been or will be requested. If the IRS were to
challenge the federal income tax status of the Partnerships or the amount of a
Unitholder's allocable share of the Partnerships' taxable income, such
challenge could result in an audit of the Unitholder's entire tax return and in
adjustments to items on that return that are unrelated to the ownership of
Units. In addition, each Unitholder would bear the cost of any expenses
incurred in connection with an examination of his personal tax return. If USRP
were to fail to qualify as a partnership for federal income tax purposes, the
REIT Corporation could fail to qualify as a REIT. See "Federal Income Tax
Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT."
If either Partnership were taxable as a corporation or treated as an
association taxable as a corporation in any taxable year, its income, gains,
losses, deductions and credits would be reflected only on its tax return rather
than being passed through to its partners, and its taxable income would be
taxed at corporate rates. In addition, its distributions to each of its
partners would be treated as dividend income (to the extent of its current and
accumulated earnings and profits), and, in the absence of earnings and profits,
as a nontaxable return of capital (to the extent of such partner's tax basis in
his interest therein), or as taxable capital gain (after such partner's tax
basis in his interest therein is reduced to zero). Furthermore, losses
realized by such Partnership would not flow through to the Unitholders.
Accordingly, treatment of either
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Partnership as a corporation for federal income tax purposes would probably
result in a material reduction in a Unitholder's cash flow and after-tax
return. See "Federal Income Tax Considerations--The Exchange
Alternative--Partnership Status."
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current strategy is to continue to acquire interests in
restaurant properties, specifically fast food and casual dining restaurant
properties. As a result, a downturn in the fast food or casual dining segment
could have a material adverse effect on the Company's total rental revenues and
amounts available for distribution to its stockholders and partners. See
"Business."
DEPENDENCE ON SUCCESS OF BURGER KING
Of the Properties, 173 are occupied by operators of BURGER KING
restaurants. In addition, the Company intends to acquire additional BURGER
KING properties. As a result, the Company is subject to the risks inherent in
investments concentrated in a single franchise brand, such as a reduction in
business following adverse publicity related to the brand or if the BURGER KING
restaurant chain (and its franchisees) were to suffer a system-wide decrease in
sales, the ability of franchisees to pay rents (including percentage rents) to
the Company may be adversely affected. See "Business--Properties."
FAILURE TO RENEW LEASES AND FRANCHISE AGREEMENTS
The Properties are leased to restaurant franchise operators pursuant to
leases with remaining terms varying from one to 28 years at December 31, 1996
and an average remaining term of nine years. No assurance can be given that
such leases will be renewed at the end of the lease terms or that the Company
will be able to renegotiate terms which are acceptable to the Company. The
Company has attempted to extend the terms of certain of its existing leases
pursuant to an "early renewal program," but in connection therewith has had to
commit to paying for certain improvements on such properties. See "Business--
Leases with Restaurant Operators."
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS
The Company's investments in real estate are subject to varying degrees of
risk inherent in the ownership of real property. The underlying value of the
Company's real estate and the income therefrom and, consequently, the ability
of the Company to make distributions to stockholders and partners, if any, are
dependent upon the operators of the Properties generating income in excess of
operating expenses in order to make rent payments. Income from the Properties
may be adversely affected by changes in national economic conditions, changes
in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, changes in interest rates and the
availability, cost and terms of mortgage funds, the impact of compliance with
present or future environmental laws, the ongoing need for capital
improvements, particularly for older restaurants, increases in operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God (which may result in uninsured
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losses), acts of war, adverse changes in zoning laws and other factors beyond
the Company's control.
ILLIQUIDITY OF REAL ESTATE MAY LIMIT ITS VALUE
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is, therefore, limited. No assurance can be given that the market
value of any of the Company's properties will not decrease in the future. If
the Company must sell an investment, there can be no assurance that the Company
will be able to dispose of it in a desirable time period or that the sales
price will recoup or exceed the amount paid for such investment.
POSSIBLE ENVIRONMENTAL LIABILITIES
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of compliance with future legislation. Under
current federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to remediate such contaminated
property properly, may adversely affect the ability of the owner of the
property to use such property as collateral for a loan or to sell such
property. Environmental laws also may impose restrictions on the manner in
which a property may be used or transferred or in which businesses may be
operated, and may impose remedial or compliance costs. The costs of defending
against claims of liability or remediating contaminated property and the cost
of complying with environmental laws could materially adversely affect the
Company's results of operations and financial condition.
In connection with the Company's acquisition of a property, a Phase I
environmental assessment is obtained. A Phase I environmental assessment
involves researching historical usages of a property, databases containing
registered underground storage tanks and other matters, including an on-site
inspection, to determine whether an environmental issue exists with respect to
the property which needs to be addressed. If the results of a Phase I
environmental assessment reveal potential issues, a Phase II assessment, which
may include soil testing, ground water monitoring or borings to locate
underground storage tanks, is ordered for further evaluation and, depending
upon the results of such assessment, the transaction is consummated or the
acquisition is terminated. Certain of the Phase I surveys obtained on the
Properties revealed potential environmental concerns and the Company has had
Phase II reports prepared with respect to such Properties.
None of the environmental surveys prepared to date has revealed any
environmental liability or compliance concern at the Properties that the
Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity, nor is the Company aware
of any such liability or concern. Nevertheless, it is possible that Phase I
surveys
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will not reveal all environmental liabilities or compliance concerns or that
there will be material environmental liabilities or compliance concerns of
which the Company will not be aware. Moreover, no assurances can be given
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Company's existing and future properties will not be affected by the
condition of neighboring properties (such as the presence of leaking
underground storage tanks) or by third parties (whether neighbors such as dry
cleaners or others) unrelated to the Company.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
The Americans with Disabilities Act (the "ADA") generally requires that
all public accommodations, including restaurants, comply with certain federal
requirements relating to physical access and use by persons with physical
disabilities. A determination that the Company or one of the Company's
properties is not in compliance with the ADA could result in the imposition of
fines, injunctive relief, damages or attorney's fees. The Company's leases
contemplate that compliance with the ADA is the responsibility of the operator.
While the Company believes that compliance with the ADA can be accomplished
without undue costs, the costs of compliance may be substantial and may
adversely impact the ability of such lessees to pay rentals to the Company. In
addition, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines or an award of damages to private
litigants.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF FACILITIES
The Company requires its lessees to maintain comprehensive insurance on
each of the properties, including liability, fire and extended coverage, and
the Company is an additional named insured under such policies. Management
believes such specific coverage is of the type and amount customarily obtained
for or by an owner on real property assets. The Company intends to require
lessees of subsequently acquired properties, including the Acquisition
Properties, to obtain similar insurance coverage. However, there are certain
types of losses, generally of a catastrophic nature, such as earthquakes and
floods, that may be uninsurable or not economically insurable, as to which the
Company's properties (including the Properties and the Acquisition Properties)
are at risk depending on whether such events occur with any frequency in such
areas. In addition, because of coverage limits and deductibles, insurance
coverage in the event of a substantial loss may not be sufficient to pay the
full current market value or current replacement cost of the Company's
investment. Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it unfeasible to use insurance
proceeds to replace a facility after it has been damaged or destroyed. Under
such circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to such property.
DEPENDENCE ON KEY PERSONNEL
Robert J. Stetson, currently President and Chief Executive Officer of the
Managing General Partner, and Fred H. Margolin, currently Chairman of the
Board, Secretary and Treasurer of the Managing General Partner, will, following
the Termination, hold similar positions with the REIT Corporation. The
Company's continued success is dependent upon the
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efforts and abilities of these and other of its key executive officers. In
particular, the loss of the services of either Mr. Stetson or Mr. Margolin
could have a material adverse effect on the Company's operations and its
ability to effectuate its growth strategy. There can be no assurance that
the Company would be able to recruit or hire any additional personnel with
equivalent experience and contacts. Following the Termination, the REIT
Corporation will enter into employment contracts with each of Messrs. Stetson
and Margolin. See "Management--Employment Agreements."
IMPACT OF COMPETITION ON OPERATIONS
ACQUISITIONS
Numerous entities and individuals compete with the Company to acquire
triple net leased restaurant properties, including entities which have
substantially greater financial resources than the Company. These entities and
individuals may be able to accept more risk than the Company is willing to
undertake. Competition generally may reduce the number of suitable investment
opportunities available to the Company and may increase the bargaining power of
property owners seeking to sell. There can be no assurance that the Company
will find attractive triple net leased properties or sale/leaseback
transactions in the future.
OPERATIONS
The restaurants operated on the Properties are subject to significant
competition (including competition from other national and regional fast food
restaurant chains) including other BURGER KING restaurants, local restaurants,
restaurants owned by BKC or affiliated entities, national and regional
restaurant chains that do not specialize in fast food but appeal to many of the
same customers and other competitors such as convenience stores and
supermarkets that sell prepared and ready-to-eat foods. The success of the
Company depends, in part, on the ability of the restaurants operated on the
properties to compete successfully with such businesses. The Company does not
intend to engage directly in the operation of restaurants. However, the
Company would operate restaurants located on its properties if required to do
so in order to protect the Company's investment. As a result, the Company
generally will be dependent upon the experience and ability of the lessees
operating the restaurants located on the properties.
RISKS ASSOCIATED WITH PROPERTY DEVELOPMENT
The Company may pursue certain restaurant property developments. New
project developments are subject to numerous risks, including construction
delays or costs that may exceed budgeted or contracted amounts, new project
commencement risks such as receipt of zoning, occupancy and other required
governmental approvals and permits and the incurrence of development costs in
connection with projects that are not pursued to completion. In addition,
development involves the risk that developed properties will not produce
desired revenue levels once leased, the risk of competition for suitable
development sites from competitors which may have greater financial resources
than the Company and the risk that debt or equity financing is not available on
acceptable terms. There can be no assurance that development activities might
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not be curtailed or, if consummated, will perform in accordance with the
Company's expectations and distributions to stockholders and partners, if any,
might be adversely affected.
RISKS NEWLY-CONSTRUCTED RESTAURANT PROPERTIES DO NOT PERFORM AS EXPECTED
The Company may pursue the acquisition of newly-constructed restaurant
properties that do not have operating histories. The acquisition of
newly-constructed restaurant properties involves numerous risks, including the
risk that newly-constructed restaurant properties will not produce desired
revenue levels (and, therefore, lease rentals) once opened.
THE COMPANY
HISTORY AND STRUCTURE OF USRP
USRP, formerly Burger King Investors Master L.P, was formed in 1985 by BKC
and QSV Properties Inc. ("QSV"), both of which were at that time wholly-owned
subsidiaries of The Pillsbury Company. QSV acted as the managing general
partner of the Partnership. BKC was a special general partner of the
Partnership until its withdrawal on November 30, 1994.
USRP effected an initial public offering in 1986 and the proceeds
therefrom were used to buy the Company's initial portfolio of 128 properties
from BKC. From 1986 through March 1995, the Master Partnership Agreement
limited the activities of the Company to managing the original portfolio of
properties.
In May 1994, an investor group led by Messrs. Stetson and Margolin,
acquired QSV and later changed its name to U.S. Restaurant Properties, Inc. In
March 1995, the Managing General Partner proposed and the Limited Partners
adopted certain amendments to the Partnership Agreements that authorized the
Company to acquire additional properties not affiliated with BKC.
The Company operates through the Operating Partnership, formerly Burger
King Operating Limited Partnership, which holds the interests in most of the
Properties. USRP owns the entire 99.01% limited partnership interest in the
Operating Partnership. The Partnerships are Delaware limited partnerships and
continue in existence until December 31, 2035, unless sooner dissolved or
terminated. In 1996, the Partnerships organized U.S. Restaurant Properties
Business Trust I and U.S. Restaurant Properties Business Trust II, Delaware
business trusts. These trusts were organized to facilitate obtaining mortgage
financing.
The principal executive offices of USRP and the Managing General Partner
are located at 5310 Harvest Hill Road, Suite 270, Dallas, Texas 75230. The
telephone number is (972) 387-1487, FAX (972) 490-9119.
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THE REIT CORPORATION
The REIT Corporation is a newly-formed Maryland corporation, all of the
stock of which is currently owned by the Managing General Partner, that was
organized to succeed to the operations of USRP pursuant to the Conversion. The
REIT Corporation was created for the purpose of effecting the Conversion.
Prior to the Conversion, the REIT Corporation will have no substantial assets
or operations. The REIT Corporation has not engaged in any activities other
than in connection with its organization and the Conversion. Upon consummation
of the Conversion pursuant to the Merger Alternative, the REIT Corporation will
indirectly acquire the operations of USRP through the Merger of USRP with a
partnership subsidiary of the REIT Corporation with USRP being the surviving
entity. If the Conversion is effected pursuant to the Exchange Alternative,
the REIT Corporation will be admitted as a limited partner of the Operating
Partnership, and at such time as the Managing General Partner effects the
Termination, a corporate subsidiary of the REIT Corporation will become the
managing general partner of each of the Partnerships.
The members of the initial REIT Board are the same as the members of the
Board of Directors of the Managing General Partner. The executive officers of
the REIT Corporation include Mr. Stetson and Mr. Margolin, the President and
Chief Executive Officer and Chairman of the Board of Directors, Secretary and
Treasurer, respectively, of the Managing General Partner. Mr. Stetson and Mr.
Margolin will hold the same positions with the Company. See "Management."
Upon consummation of the Conversion pursuant to the Merger Alternative,
the current partners of USRP will become the stockholders of the REIT
Corporation and the Operating Partnership will become a subsidiary of the REIT
Corporation. If the Conversion is effected pursuant to the Exchange
Alternative, the Master Partnership Agreement will be amended to provide the
Unitholders with the right, from time to time at their discretion, to exchange
each Unit for one share of Common Stock but a Unitholder will be required to
make such exchange prior to the transfer of the Units to third parties. Until
such time as all Unitholders exchange their Units for shares of Common Stock,
USRP will remain in existence. After the Conversion, the Company's business
strategy will be to continue the operations of the Company in substantially the
same manner in which it has been operated prior to the Conversion and to
acquire, develop, own and manage additional restaurant properties throughout
the United States and internationally. See "--Strategy" below. The Company's
investment objectives will be to maximize cash available for distribution to
its stockholders and partners, if any, to protect the Company's capital and to
provide the opportunity to realize capital growth from the appreciation in
value of a diversified portfolio of properties.
The principal executive offices of the REIT Corporation are located at
5310 Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone number
is (972) 387-1487.
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STRATEGY
The Company's principal business objective is to expand and diversify its
property portfolio through frequent acquisitions of small to medium-sized
portfolios of fast food and casual dining restaurant properties. In
conjunction with the Conversion, the Partnership Agreements are being amended
to provide the Company with increased flexibility to pursue other investment
opportunities that arise during the ordinary course of acquiring and leasing
restaurant properties and that compliment its existing business strategy. As
part of its strategy of expanding its property portfolio, the Company intends
to build-out properties in conjunction with other food vendors, such as
convenience stores, and retail outlets and may, from time to time, originate
loans secured by real estate. See "Business--General" and "--Investment
Criteria." The Company intends to achieve growth and diversification while
maintaining low portfolio investment risk through adherence to proven
acquisition criteria with a conservative capital structure. The Company
intends to continue to expand its portfolio by acquiring triple net leased
properties and structuring sale/leaseback transactions consistent with the
following strategies:
- FOCUS ON RESTAURANT PROPERTIES. The Company will take advantage of
senior management's extensive experience in fast food and casual dining
restaurant operations to identify new investment opportunities and
acquire restaurant properties satisfying the Company's investment
criteria. Management believes, based on its industry knowledge and
experience, that relative to other real estate sectors, restaurant
properties provide numerous acquisition opportunities at attractive
valuations. In addition, the proposed amendments to the Partnership
Agreements will give the Company increased flexibility to pursue other
investment opportunities that arise during the ordinary course of
acquiring and leasing restaurant properties and authorize the Company,
through the Operating Partnership, to originate loans secured by real
estate.
- INVEST IN MAJOR RESTAURANT BRANDS. The Company intends to continue
to acquire properties operated as major national and regional restaurant
brands, such as BURGER KING, DAIRY QUEEN, HARDEE'S and CHILI'S by
competent, financially-stable operators. Certain of the Properties are
also operated as ARBY'S, GRANDY'S, PIZZA HUT, and SCHLOTZKSY'S
restaurants. Management believes, based on its industry knowledge and
experience, that successful restaurants operated under these types of
brands will continue to offer stable, consistent income to the Company
with minimal risk of default or non-renewal of the lease and franchise
agreement. As a result of its concentration on major national and
regional brands, in the last three fiscal years, of all rental revenues
due, more than 99.5% has been collected.
- ACQUIRE EXISTING RESTAURANTS. The Company's strategy will continue
to focus primarily on the acquisition of existing fast food and casual
dining chain restaurant properties that have a history of profitable
operations with a remaining term on the current lease of at least five
years. The average remaining lease term for the Properties is nine
years. Management believes, based on its industry knowledge and
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experience, that acquiring existing restaurant properties provides a
higher risk-adjusted rate of return to the Company than acquiring
newly-constructed restaurants.
- CONSOLIDATE SMALLER PORTFOLIOS. Management believes, based on its
industry knowledge and experience, that pursuing multiple transactions
involving smaller portfolios of restaurant properties (generally having
an acquisition price of less than $3 million) results in a more
attractive valuation because the size of such transactions generally
does not attract large institutional property owners. Smaller buyers
typically are not well capitalized and may be unable to compete for such
transactions. Larger transactions involving multiple properties
generally attract several institutional bidders, often resulting in a
higher purchase price and lower investment returns to the purchaser. In
certain circumstances, however, the Company has identified, evaluated
and pursued portfolios valued at up to $50 million that present
attractive risk/return ratios.
- MAINTAIN CONSERVATIVE CAPITAL STRUCTURE. The Company anticipates
maintaining its policy of limiting the ratio of total indebtedness to
50% or less of the greater of (i) the aggregate market value of all
issued and outstanding Units, if any, and Common Stock plus total
outstanding indebtedness or (ii) the original cost of all of the
Company's properties as of the date of such calculation. The Company,
however, may from time to time reevaluate its borrowing policies in
light of then-current economic conditions, relative costs of debt and
equity capital, market values of properties, growth and acquisition
opportunities and other factors.
THE CONVERSION
BACKGROUND OF THE CONVERSION
Management of the Managing General Partner initiated discussions with the
Board of Directors in April 1996 regarding the possibility of converting USRP
into REIT form. Management believed that the market capitalization of USRP did
not properly reflect its underlying asset values. In addition, management was
aware of the increasingly favorable market reaction to REITs as evidenced by
increases in share prices of existing REITs and successful initial public
offerings by newly-formed REITs. From April 1996 until December 1996,
management continued to analyze the advisability of converting to a
self-advised REIT structure. Management made several presentations to the
Board of Directors during this time period regarding the information gathered
from its analysis. The Board of Directors deliberated several times with
respect to the Conversion at which time outside advisors were consulted with
respect to both the advantages of the Conversion and the possible
disadvantages, both legal and financial, to the Unitholders. In order for the
Conversion to happen, the Managing General Partner would need to withdraw as
managing general partner of the Partnerships. Such withdrawal, and the
resulting compensation to be paid to the Managing General Partner, created a
conflict of interest for management. Accordingly, on December 16, 1996, the
Board of Directors appointed the Special Committee to establish the Acquisition
Price. The Special Committee was authorized to negotiate the Acquisition Price
on behalf of the Unitholders with applicable related parties
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and to retain legal counsel. All expenses of the Special Committee,
including the fee of Morgan Keegan, are payable by USRP. See "--Analysis of
the Special Committee" and "--Costs of the Conversion."
Based on the recommendation of the Special Committee as to the fairness of
the Acquisition Price, the Board of Directors approved the Conversion on
February 5, 1997 and determined that the Conversion is in the best interests
of, and on terms that are fair to, the Unitholders. The Managing General
Partner recommends approval and adoption of the Conversion by the Limited
Partners. The Board of Directors believes that the Conversion will result in
the benefits to the Unitholders described below under "--Advantages of the
Conversion." The Board of Directors believes that these advantages outweigh
the disadvantages of and risks associated with the Conversion described under
"Risk Factors" and "--Disadvantages of the Conversion." The Board of
Director's substantive recommendations and conclusions are based on the
analysis of the advantages and risks of converting from partnership to REIT
form and making the changes in operating format described herein.
DISADVANTAGES OF THE CONVERSION
The Board of Directors believes that the Conversion may have the following
disadvantages, which it believes are substantially outweighed by the advantages
described below:
POSSIBLE DISADVANTAGES RESULTING FROM REIT STATUS
The REIT Corporation was organized and intends to conduct its operations
so as to qualify for taxation as a REIT under applicable provisions of the
Code. A qualified REIT may avoid paying federal income tax because it is
allowed to deduct certain dividends paid to its stockholders in computing its
taxable income. To qualify as a REIT, the REIT Corporation is required, among
other things, to meet certain stock ownership, income, asset and distribution
rules and tests. Under certain circumstances, the failure of the REIT
Corporation to meet the qualifications rules and tests could cause the REIT
Corporation to be taxed as a corporation, in which case dividends paid to the
stockholders would not be deductible by the REIT Corporation in computing its
taxable income, subjecting the REIT Corporation to entity level taxes to which
USRP is not subject. Furthermore, the REIT Corporation might not be eligible
to elect to be taxed as a REIT for five taxable years (including the year of
disqualification). Under certain other circumstances, if the REIT Corporation
failed to meet certain qualification rules and tests, the REIT Corporation
would continue to qualify as a REIT, but the REIT Corporation could be required
to pay interest and federal income and/or excise taxes. In order to minimize
the chances that the REIT Corporation will violate stock ownership rules, in
certain circumstances the transfer of shares of Common Stock will be limited or
prohibited. In general, a stockholder of the REIT Corporation would be taxed
only on dividends paid to it by the REIT Corporation, with such dividends being
treated as ordinary income, capital gains, tax-free recovery of its basis in
its shares of Common Stock or as gain from the sale or exchange of property,
depending on the circumstances. Unlike partners of USRP, stockholders of the
REIT Corporation will not be deemed to receive for tax purposes a proportional
interest in the income and expenses of the REIT Corporation.
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LOSS OF SECTION 754 BENEFITS
A person who acquires Units is entitled to certain benefits relating to
basis adjustments under Section 754 of the Code upon the sale or exchange of
Units or the death of a Unitholder. There will be no Section 754 adjustments
upon the sale or exchange of shares of Common Stock or the death of a
stockholder of the REIT Corporation. The basis adjustments attributable to
Unitholders will become part of the REIT Corporation's basis for its assets at
the time of the Conversion. Unitholders who would have been entitled to
additional depreciation deductions attributable to such adjustments will no
longer be able to use such deductions to reduce their share of annual income
from distributions from the REIT Corporation. The REIT Corporation's
depreciation deductions will be allocated ratably among the stockholders of the
REIT Corporation in determining the portion of the distributions by the REIT
Corporation that will be taxable by the recipients thereof as ordinary
dividends. As a result, Unitholders with significant Section 754 adjustments
(generally those who purchased their Units at higher prices and on more recent
dates) will generally recognize somewhat greater amounts of taxable income each
year following the Conversion then if the Conversion had not occurred.
RESTRICTIONS ON TRANSFER OF SHARES OF COMMON STOCK
Certain provisions of the Articles may have the effect of discouraging a
third party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company. In addition, the Articles prohibit
ownership, either directly or indirectly, under applicable attribution rules of
the Code, of more than 8.75% of the shares of the Common Stock by any
stockholder, subject to certain exceptions. Such ownership limit may have the
effect of preventing an acquisition of control of the Company without the
approval of the REIT Board. Finally, under the MGCL, certain business
combinations between a Maryland corporation and an "Interested Stockholder" are
prohibited for five years from the most recent date on which the Interested
Stockholder became an Interested Stockholder. The existence of these
contractual and statutory prohibitions on the transfer of stock and the
acquisition of control may inhibit a change in control of the Company under
circumstances that could give the holders of shares of Common Stock the
opportunity to realize a premium over the then-prevailing market prices. The
Master Partnership Agreement does not contain any such provisions, and USRP, as
a Delaware limited partnership, is not subject to the same statutory
prohibitions on business combinations.
MODIFICATION OF INVESTING AND FINANCING POLICIES
The investment and financing policies of the Company following the
Conversion will be determined by the REIT Board. These policies may be amended
or revised at any time and from time to time at the discretion of the REIT
Board without a vote of the stockholders or partners, if any, of the Company.
Under the terms of the Master Partnership Agreement, any changes to the powers
of the managing general partner or changes in the business to be conducted by
USRP require the consent of a majority in interest of the Unitholders.
ADVANTAGES OF THE CONVERSION
ADVANTAGES TO UNITHOLDERS
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The Board of Directors is recommending that the Limited Partners approve
the Conversion by voting in favor of both the Merger Alternative and the
Exchange Alternative because it believes that the Conversion will result in the
following advantages to the Unitholders: (i) the potential for improved market
value of the Common Stock as compared to the Units; (ii) greater access by the
Company to public and private sources of debt and equity capital; (iii) the
ability to issue various classes of securities; (iv) the reduction in the costs
of managing the Properties; (v) the ability to retain the operating partnership
structure; and (vi) savings in administrative costs relating to federal income
tax reporting and administration for the Unitholders. These factors, each of
which is more fully described below, are closely inter-related, and relative
weights were not assigned to them. The Board of Directors believes that none
of these advantages can be fully realized in the current format.
TERMINATION OF OPERATING PARTNERSHIP GENERAL PARTNER INTEREST EXPECTED TO
BE ACCRETIVE TO UNITHOLDERS. As part of the Conversion, the Managing General
Partner will be effecting the Termination. Accordingly, the REIT Corporation
will become self-advised and will, as a result of the termination of all
management fees, have additional cash for distribution to its stockholders.
For the year ended December 31, 1996, the Managing General Partner was paid
$2.5 million with respect to the Operating Partnership General Partner Interest
and the USRP Interest. In addition, because the fee which would be payable to
the Managing General Partner pursuant to the Operating Partnership General
Partner Interest increases by at least 1% of the value of new acquisitions, the
savings to the Company from the Termination will continue to grow as the
Company acquires additional properties. In order for the Termination to be
accretive (I.E. increase the cash available for distribution per Unit or share
relative to USRP remaining as an advised entity) to the Unitholders on a cash
available for distribution per Unit basis, the Company needs to acquire an
additional $44 million of properties, assuming the acquired properties produce
the same rate of return as the historical rate of return on the Company's
properties. As of April 17, 1997, the Company had approximately $72 million of
properties under binding contract. Accordingly, on a pro forma basis, after
giving effect to the Termination and the acquisition of such additional
properties, as of December 31, 1996, the cash available for distribution per
Unit for 1996 would have increased from $2.62 to $2.67. There can be no
assurance that all of such properties will be acquired or that additional
properties will be available at prices acceptable to the Company.
Additionally, pro forma results are not necessarily indicative of what the
Company's financial position would have been had such transactions occurred on
the assumed date. See "Risk Factors--Acquisition and Expansion Risks,"
"Selected Historical and Pro Forma Financial Information and Other Data" and
"Price Range of Units and Distribution Policy." These initial savings in the
first year are partially offset by the one-time costs of completing the
Conversion (all of which are payable by USRP), currently estimated to be
$580,000. See "--Costs of the Conversion."
THE POTENTIAL FOR IMPROVED MARKET VALUE. The greater number of investors
that currently consider investments in REITs as compared to partnerships may
affect the market price per share of Common Stock versus the market price per
Unit. Management also believes that certain institutional investors in real
estate, such as mutual funds, restrict virtually all of their investments to
REITs and generally do not invest in partnerships. The Conversion may,
therefore, expand the potential investment base of the Company to include
institutional and other investors that do not typically invest in partnership
equity securities because of various tax and
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administrative reasons. This, in turn, could result in a more active and
diversified trading market for the Common Stock than currently exists for the
Units. In addition, the Board of Directors anticipates that the Common Stock
(as compared to the Units) will receive increased market interest through
expanded review and evaluation by research analysts.
POTENTIALLY GREATER ACCESS TO EQUITY AND DEBT MARKETS. Because certain
types of investors do not typically invest in limited partnership securities,
the Company, as a REIT, may have greater access to the public and private
equity capital markets than it now has, potentially enabling the Company to
raise capital on more favorable terms than are now available. Management
believes that certain investment bankers will only provide financial services
to real estate entities that have adopted the REIT structure. Accordingly,
following the Conversion, the Company may be able to attract greater interest
from a larger number of investment bankers thereby increasing the Company's
financing options. Additionally, it is management's experience that rating
agencies look more favorably on real estate entities that are self-advised.
Because the Company's strategy is to continue to acquire properties to increase
earnings, the ability to access more, lower cost capital should enable the
Company to grow at a more rapid rate. No assurance can be given that the
Company will be able to issue additional equity or debt securities after the
Conversion, or that the Conversion will result in any increase in the Company's
investor base or the receipt of any additional investor interest or a reduction
in the cost of capital.
ISSUANCE OF VARIOUS CLASSES OF SECURITIES. Following the Conversion, the
Company will be able to raise additional capital through the issuance of
various classes of securities (including Preferred Stock) which may not be
dilutive to holders of Common Stock.
NEW STRUCTURE RETAINS OPERATING PARTNERSHIP. Following the Conversion,
the Operating Partnership will remain in existence and will continue to own the
Properties. As a result, the REIT Corporation will be an UPREIT, thereby
permitting the Company to continue to be able to effect certain tax-free
property acquisitions through the issuance of Operating Partnership interests
to sellers of such properties that are partnerships. The Company has acquired
a significant portion of the Properties through such exchanges, and management
believes future acquisitions will be similarly structured.
COST SAVINGS RESULTING FROM THE SIMPLIFICATION OF TAX REPORTING. USRP's
organization as a limited partnership makes the preparation of tax returns by
Limited Partners and USRP complex, expensive and burdensome. The Board of
Directors believes that the cost of complying with the partnership reporting
requirements at the USRP level is significantly greater than the cost of
complying with the reporting requirements applicable to the REIT Corporation.
In this regard, the Board of Directors believes that the Company, following the
ultimate completion of the Conversion, will realize annual savings of
administrative costs of approximately $200,000. These initial savings in the
first year are partially offset by the one-time costs of completing the
Conversion (all of which are payable by USRP), currently estimated to be
$580,000. See "--Costs of the Conversion." Further, the ownership of Common
Stock rather than Units will greatly simplify tax reporting with respect to an
investment in the Company for each Limited Partner's individual federal tax
returns in future years.
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ADVANTAGES TO THE MANAGING GENERAL PARTNER/MANAGEMENT
In addition to the advantages described above, which apply to all
Unitholders (including the Managing General Partner following the Termination),
the Managing General Partner and management thereof will realize the following
benefits from the Conversion:
RECEIPT OF ACQUISITION PRICE. As a result of the Termination, the
Managing General Partner will receive the Acquisition Price, consisting of
shares of Common Stock, Units and/or an interest in the Operating Partnership.
Receipt of the Acquisition Price enables the Managing General Partner to
immediately realize the present value of the projected payments otherwise
payable to it pursuant to the Operating Partnership General Partner Interest.
The Acquisition Price consists of (i) the 850,000 Initial Shares, which would
have a value of $24,225,000 assuming the market price of an Initial Share
(which could be a share of Common Stock, a Unit or an interest in the Operating
Partnership) at the time of its issuance is comparable to the market price of a
Unit ($28.50 at April 25, 1997) and (ii) up to 550,000 Contingent Shares, which
would have a value of up to $15,675,000 assuming the market price of a
Contingent Share (which could be a Unit or an interest in the Operating
Partnership) at the time of its issuance is comparable to the market price of a
Unit ($28.50 at April 25, 1997).
MANAGEMENT EMPLOYMENT ARRANGEMENTS. Each of Messrs. Stetson and Margolin,
the President and Chief Executive Officer and the Chairman of the Board,
Secretary and Treasurer, respectively, of the Managing General Partner, will be
employed by the REIT Corporation in similar capacities for compensation
commencing at $250,000 per year, subject to increase (up to a maximum annual
salary and cash bonus of $300,000 until the end of the year 2000) at the
discretion of the REIT Board, and will be eligible to receive annual incentive
bonuses and stock options.
The advantages of the Conversion should be considered by the Limited
Partners in light of the disadvantages of and the risks associated with the
Conversion described herein. See "Risk Factors" and "--Disadvantages of the
Conversion."
THE MERGER ALTERNATIVE
If a satisfactory Ruling is received from the IRS, the Conversion, if
approved by the Limited Partners, would be effected by the Merger Alternative.
The Merger Alternative would be implemented through the Merger of USRP with the
REIT Corporation, as described below. The Merger will be effected pursuant to
the terms and conditions of the Merger Agreement. In accordance with the terms
of the Merger Agreement, the REIT Sub would be merged with and into USRP with
USRP being the surviving entity. The Operating Partnership will remain in
existence following the Merger, with USRP, the REIT Corporation and one or more
of the REIT Corporation's corporate subsidiaries as the sole partners thereof
following consummation of the Merger.
Pursuant to the terms of the Merger Agreement, the Unitholders will
receive in exchange for their Units one share of Common Stock for each Unit
held by them prior to the Conversion, or an aggregate of 7,453,250 shares of
Common Stock (99% of all shares of Common Stock
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to be outstanding following the Conversion) on account of the Unitholders'
aggregate 99% percentage interest in USRP. The Managing General Partner will
initially receive 75,285 shares of Common Stock (1% of all shares of Common
Stock to be outstanding following the Conversion) as part of the Acquisition
Price on account of the Termination. See "--Termination of Operating
Partnership General Partner Interest" and "--Allocation of Shares of Common
Stock Among Unitholders and the Managing General Partner."
THE MERGER AGREEMENT
If the Conversion is effected by the Merger Alternative (I.E., a favorable
Ruling is received), the Merger will be effected pursuant to the terms and
conditions of the Merger Agreement. A vote in favor of the Merger Alternative
will constitute a vote approving the Merger Agreement. The Merger Agreement
provides that, subject to the conditions thereof, the REIT Corporation will
indirectly acquire the operations of USRP through the merger of the REIT Sub
with and into USRP with USRP as the surviving entity and, as a result, becoming
a subsidiary of the REIT Corporation. Concurrently with the Merger, the
Managing General Partner will withdraw as managing general partner of USRP and,
pursuant to the terms of the Merger Agreement, a corporate subsidiary of the
REIT Corporation will be substituted as managing general partner of USRP. The
following is a summary of certain provisions of the Merger Agreement. Such
summary is qualified in its entirety by reference to the Merger Agreement which
is attached hereto as APPENDIX A.
EFFECTIVE TIME. The Merger will become effective after all of the
conditions to consummation of the Merger have been satisfied or on such later
date as the parties may mutually agree (the "Effective Time"), by filing with
the Secretary of State of the State of Delaware a certificate of merger as
required by applicable Delaware law. See "--Conditions to the Merger" below.
It is presently anticipated that the Effective Time of the Merger will be 11:59
p.m. on September 30, 1997.
AGREEMENTS OF THE REIT CORPORATION AND USRP. The Merger Agreement
provides, among other things, that (i) USRP will use its best efforts to obtain
the approval of the Merger Agreement by Limited Partners holding a majority of
the outstanding Units on the Record Date, and (ii) the REIT Corporation will
use its best efforts to obtain approval to list the shares of Common Stock on
the NYSE subject to notice of issuance.
The Merger Agreement provides that the Company shall indemnify and hold
harmless, and advance expenses to, the Managing General Partner and, as
applicable, each officer, director, partner or other person controlling either
the Managing General Partner or any affiliate of it against any costs or
expenses (including reasonable attorney's fees, judgments, fines, losses,
claims, damages or liabilities) incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to the transactions contemplated by
the Merger Agreement, whether asserted or claimed prior to, at or after the
Effective Time, to the fullest extent permitted by law. In addition, the
Merger Agreement provides that the Company shall assume and agree to comply
with USRP's indemnity obligations under the Master Partnership Agreement with
respect to liabilities arising out of actions or omissions occurring prior to
the Effective Time.
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CONDITIONS TO THE MERGER. The obligations of each party to effect the
Merger are subject, among other things, to the following conditions: (i) the
approval and adoption of the Merger Agreement and transactions contemplated
thereby by the affirmative vote of the holders of a majority of the outstanding
Units; (ii) no statute, rule or regulation having been enacted or promulgated
by any governmental authority which prohibits the exchange of Units for Common
Stock or consummation of the Merger; (iii) no order or injunction of a United
States or state court of competent jurisdiction in effect prohibiting the
exchange of Units or consummation of the Merger; (iv) the receipt by USRP of an
opinion of counsel to the effect that the Merger will be treated as part of a
transaction described in Section 351 of the Code; (v) the receipt of a
favorable Ruling from the IRS as to treatment of the Merger as part of a
transaction described in Section 351 of the Code; (vi) the receipt of all
permits, qualifications and other governmental approvals as are required under
applicable law in connection with the Merger and other transactions
contemplated by the Merger Agreement; (vii) the approval of the Common Stock
for listing on the NYSE upon official notice of issuance; and (viii) the
approval of the amendments to the Partnership Agreements by the affirmative
vote of the holders of a majority of the Units outstanding as of the Record
Date. These conditions may not be waived by USRP.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties as to (i) the due organization and good standing
of each of the parties thereto; (ii) the authority of each of the parties
thereto to enter into the Merger Agreement and to perform the transactions
contemplated thereby; and (iii) the absence of conflicts with the execution of
the Merger Agreement by each of the parties thereto and the performance by each
of the parties thereto of the transactions contemplated thereby.
TERMINATION AND AMENDMENT. The Merger Agreement may be terminated at any
time prior to the consummation of the Merger by mutual written consent of the
REIT Corporation and USRP. In the event of such termination of the Merger
Agreement, the Merger Agreement will become void and have no effect.
At any time before or after approval and adoption of the Merger Agreement
by the Limited Partners, the Merger Agreement may be amended in any manner
(except the right of Unitholders to receive one share of Common Stock in
exchange for each Unit) as may be determined in the judgment of the REIT Board
and the Board of Directors to be necessary, desirable or expedient in order to
clarify the intention of the parties thereto or to effect or facilitate the
purposes and intent of the Merger Agreement. If any amendment to the Merger
Agreement is material to the Limited Partners' decision to vote for or against
its approval and adoption, the Company will distribute to the Limited Partners
information regarding the amendment prior to the expiration of the solicitation
period and the solicitation period will be extended to the extent necessary to
allow Limited Partners to consider fully the implications of such amendment. A
revised fairness opinion will be obtained from Morgan Keegan if a material
amendment to the Merger Agreement is made.
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
In order to effect the Conversion, whether through the Merger Alternative
or the Exchange Alternative, and to provide greater operating flexibility
following the Conversion, certain
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amendments to the Partnership Agreements are proposed to be made. The
proposed amendments to the Partnership Agreements (i) establish the
Acquisition Price to be paid in connection with the Termination (which shall
occur at such time as the Managing General Partner ceases to be the managing
general partner of the Partnerships, whether by transfer of interest,
withdrawal or removal (other than for "cause")) and the procedure to be
followed by both Partnerships at the time of the Termination; (ii) permit the
issuance of Operating Partnership interests with terms comparable to
preferred stock which may, from time to time, be issued by the REIT
Corporation; (iii) expand the powers of the Partnerships to enable them to
originate loans secured by real estate and to acquire properties not
exclusively used by restaurants; (iv) permit the admission of new limited
partners of the Operating Partnership at the discretion of the managing
general partner; and (v) provide a mechanism to permit holders of interests
in the Operating Partnership and/or Units to exchange such interests for
shares of Common Stock. Copies of the material amended provisions of the
Master Partnership Agreement and the Operating Partnership Agreement are
attached hereto as APPENDIX C and APPENDIX D, respectively, and are
incorporated herein by reference. A vote in favor of either the Merger
Alternative or the Exchange Alternative will constitute a vote approving each
of the amendments to the Partnership Agreements described below. The Master
Partnership Agreement requires the Limited Partners to approve by a majority
vote any amendment to the Operating Partnership Agreement if such an
amendment to the corresponding provision of the Master Partnership Agreement
would require a majority vote of the Limited Partners. Each of the proposed
amendments to the Partnership Agreements requires such a vote. If the
Conversion is effected by the Merger Alternative, USRP will be merged into
the REIT Sub and the Master Partnership Agreement would no longer have any
force or effect.
The definition of "Other Restaurant Properties" will be amended and a new
definition of "Retail Properties" added in both Partnership Agreements to
provide for the acquisition of properties to be built out or leased to other
food vendors, such as convenience stores, whose revenues are not exclusively
derived from food sales, and retail outlets.
Article III and Section 7.2 of the Partnership Agreements will be amended
to expressly grant to the Partnerships and the managing general partner of the
Partnerships on behalf of the Partnerships, respectively, the power and
authority to originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnerships' underwriting criteria, which shall be
established by the managing general partner of the Partnership.
Section 5.2 of the Operating Partnership Agreement will be amended to
allow the issuance of additional interests in the Operating Partnership
("Operating Partnership Interests"). Such Operating Partnership Interests may
be issued in one or more classes, or one or more series of any such classes,
with such designations, preferences and relative, participating, optional or
other special rights powers and duties, including rights, powers and duties
senior to other Operating Partnership Interests, all as may be determined by
the managing general partner of the Operating Partnership in its sole and
absolute discretion. Additional Operating Partnership Interests may not be
issued to USRP or the REIT Corporation unless either (i) the additional
Operating Partnership Interests are issued in connection with the grant, award
or issuance of Units or shares of capital stock of the REIT Corporation, which
Units or shares have designations, preferences
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and other rights such that the economic interests attributable to such Units
or shares are substantially similar to the designations, preferences and
other rights of the additional Operating Partnership Interests issued to USRP
or the REIT Corporation and (ii) USRP or the REIT Corporation shall make a
capital contribution to the Operating Partnership in an amount equal to the
proceeds, if any, raised in connection with the issuance of such Units or
shares of capital stock, or the additional Operating Partnership Interests
are issued to all partners in proportion to their respective percentage
interests in the Operating Partnership.
Following the date of execution of the amended Operating Partnership
Agreement, neither USRP nor the REIT Corporation may grant, award or issue
additional Units or shares of capital stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase such Units or shares of capital stock (collectively "New Securities"),
other than to all holders of such Units or shares of capital stock unless (i)
the managing general partner shall cause the Operating Partnership to issue to
USRP or the REIT Corporation Operating Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of the Operating
Partnership having designations, preferences and other rights, all such that
the economic interests are substantially the same as those of the New
Securities, and (ii) USRP or the REIT Corporation makes a capital contribution
to the Operating Partnership of the proceeds from the grant, award or issuance
of such New Securities and from the exercise of rights contained in such New
Securities.
A new Section 5.4 will be added to the Operating Partnership Agreement and
a new Section 5.14 will be added to the Master Partnership Agreement to permit
the exchange of interests in the Partnerships for shares of Common Stock based
on the exchange ratio provided therein, which initially will be one Partnership
unit for one share of Common Stock. Both Partnership Agreements will prohibit
the transfer of the units to third parties unless previously exchanged for
shares of Common Stock. The exchange ratio is subject to adjustment, however,
upon the occurrence of certain events such as the declaration of a dividend by
the REIT Corporation in shares of Common Stock, the subdivision of the
outstanding shares of Common Stock or the combination of outstanding shares of
Common Stock into a smaller number of shares. The exchange may only be
effected with respect to a minimum of 1,000 partnership units (in the case of
the Operating Partnership and 100 Units in the case of USRP) or, if the holder
holds fewer than 1,000 units (or 100 Units, as applicable) all such units. In
addition, the exchange right may not be exercised if issuing the shares of
Common Stock in the exchange would be prohibited under the REIT Corporation's
Articles. The Operating Partnership Agreement will permit such exchange to
occur at anytime, and the Master Partnership Agreement will not permit such
exchange to occur until the Common Stock is listed on the NYSE.
Section 9.1 of the Partnership Agreements, relating to the compensation of
the managing general partner of the Partnerships, will be amended to provide
for the conversion of the Operating Partnership General Partner Interest at
such time as the Managing General Partner ceases to be the managing general
partner of the Partnerships, whether as a result of transfer, withdrawal or
removal (other than for cause). Section 9.1 will also be amended to cause the
successor managing general partner to issue to the Managing General Partner the
Acquisition Price (less the value of the number of shares of Common Stock
received as part of the Acquisition Price). See "--Termination of the
Operating Partnership General Partner Interest."
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Section 9.3 of the Partnership Agreements will be amended to provide for
the payment of fees to the Managing General Partner (prior to the Termination)
for the origination of mortgage loans on generally the same terms and
conditions as apply to the acquisition of restaurant properties.
A new Section 9.4 will be added to the Partnership Agreements to provide,
following the Termination, that the sole compensation for services rendered by
all subsequent general partners of the Partnerships shall be the reimbursement
by the Partnerships on a monthly basis of expenses incurred by any such general
partner in connection with the applicable Partnership's business or for the
benefit of the applicable Partnership.
Section 13.1 of the Operating Partnership Agreement and Section 14.1
Master Partnership Agreement will be amended to provide that, once the
Termination has been effected, the REIT Corporation, or an affiliate of the
REIT Corporation, shall automatically succeed as managing general partner of
the Partnerships.
EXCHANGE ALTERNATIVE
If the Ruling is not obtained from the IRS, the Conversion, if approved by
the Limited Partners, would be effected through the admission of the REIT
Corporation as a limited partner of the Operating Partnership and the exchange
of Units for shares of Common Stock by the Unitholders from time to time, at
their discretion, pursuant to the exchange rights to be provided for in the
amended Master Partnership Agreement, as described above. The Exchange
Alternative will be implemented only if USRP does not receive a favorable
Ruling from the IRS.
If the Conversion is effected pursuant to the Exchange Alternative,
Unitholders will not be required to exchange their Units for shares of Common
Stock until such time as they want to sell their Units, which exchange right
would only become effective at such time as the Common Stock is listed on the
NYSE and would require such an exchange to take place prior to the sale of the
Units to a third party. Additionally, in order to effect the Exchange
Alternative, each of the other amendments proposed to be made to the Master
Partnership Agreement described above under "--The Merger Alternative--
Amendments to the Partnership Agreements" would become effective. A vote in
favor of the Exchange Alternative will constitute a vote approving the
amendments to the Master Partnership Agreement described above.
TERMINATION OF THE OPERATING PARTNERSHIP GENERAL PARTNER INTEREST
GENERAL
As described above, one of the amendments to the Partnership Agreements
being proposed in order to effect the Conversion is the establishment of the
Acquisition Price to be paid to the Managing General Partner for the Operating
Partnership General Partner Interest and the USRP Interest. If the Conversion
is effected by the Merger Alternative, the Managing General Partner will
withdraw as managing general partner of the Partnerships effective as of August
31, 1997 (unless extended by the Special Committee in its sole discretion) and,
pursuant to the terms of the Merger Agreement, a corporate subsidiary of the
REIT Corporation will be
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substituted as managing general partner of the Partnerships. If the Exchange
Alternative is adopted, the Managing General Partner will withdraw as the
managing general partner of the Partnerships effective as of August 31, 1997
(unless extended by the Special Committee in its sole discretion) and,
pursuant to the terms of the Partnership Agreements, a corporate subsidiary
of the REIT Corporation would be substituted as managing general partner of
the Partnerships. In conjunction with either such withdrawal, the Managing
General Partner will (i) convert the Operating Partnership General Partner
Interest (if the Conversion is effected through the Merger Alternative) or
assign such interest to USRP (if the Conversion is effected through the
Exchange Alternative) pursuant to the terms of the Partnership Agreements and
(ii) convert the USRP Interest pursuant to the terms of the Merger Agreement
and/or the Master Partnership Agreement, as applicable, for the Acquisition
Price. As a result of the Termination, the Company would become self-advised
and no fees would be payable to a third party manager.
OPERATING PARTNERSHIP GENERAL PARTNER INTEREST AND USRP INTEREST
The Acquisition Price is being paid for the conversion or assignment
(depending upon how the Conversion is effected) of the Operating Partnership
General Partner Interest (consisting of the Managing General Partner's interest
in (i) its allocable share of income, profits, loss and distributions of the
Operating Partnership, as general partner thereof (the "OP Interest") and
(ii) fees and disbursements payable by the Operating Partnership for the
acquisition and management of the Operating Partnership's properties and the
conversion of the USRP Interest. In May 1994, an investor group, led by
Messrs. Stetson and Margolin, acquired all of the outstanding stock of QSV, the
managing general partner of the Partnerships, for $3.0 million, and as a result
acquired the Operating Partnership General Partner Interest and the USRP
Interest. The USRP Interest is a 1% interest in USRP and the OP Interest is a
.99% interest in the Operating Partnership, which in the aggregate represents a
1.98% interest in the distributions of the Operating Partnership.
PAYMENTS TO THE MANAGING GENERAL PARTNER. The Managing General Partner is
paid a non-accountable (no support is required for payment) annual allowance
designed to cover the costs that the Managing General Partner incurs in
connection with the management of the Properties (other than reimbursements for
out-of-pocket expenses paid to third parties). The allowance is adjusted
annually to reflect any cumulative increases in the Consumer Price Index
occurring after January 1, 1986, and was $1,175,000 for the year ended
December 31, 1996. The allowance is paid quarterly, in arrears.
In addition, to compensate the Managing General Partner for its efforts
and increased internal expenses resulting from additional properties, the
Managing General Partner is paid with respect to each additional property
purchased: (i) a one-time acquisition fee equal to 1% of the purchase price
for such property and (ii) an annual fee equal to 1% of the purchase price for
such property, adjusted for increases in the Consumer Price Index. For 1996,
the aggregate one-time acquisition fees equaled $1,043,000 which was
capitalized and the increased annual fee equaled $495,000.
In addition, if the Rate of Return (as defined in the Partnership
Agreements) on USRP's equity in all additional properties exceeds 12% per annum
for any fiscal year, the Managing
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General Partner will be paid an additional fee equal to 25% of the cash flow
received with respect to such additional properties in excess of the cash
flow representing a 12% rate of return thereon. For 1996, the Managing
General Partner received fees based on the Rate of Return of $93,000.
However, to the extent the Managing General Partner receives distributions in
excess of those provided by its 1.98% partnership interests, such
distributions will reduce the fee payable with respect to such excess cash
flow from any additional properties. Except as provided above, such payments
are in addition to distributions made by the Partnership to the Managing
General Partner in its capacity as a partner of USRP.
PARTNERSHIP ALLOCATIONS. Net cash flow from operations of USRP that is
distributed is allocated 98.02% to the Unitholders and 1.98% to the Managing
General Partner until the Unitholders have received a simple (non-cumulative)
annual return for such year equal to 12% of the Unrecovered Capital per Unit
(as defined in the Master Partnership Agreement); then any distributed cash
flow for such year is allocated 75.25% to the Unitholders and 24.75% to the
Managing General Partner until the Unitholders have received a total simple
(non-cumulative) annual return for such year equal to 17.5% of the Unrecovered
Capital Per Unit; and then any excess distributed cash flow for such year is
allocated 60.4% to the Unitholders and 39.6% to the Managing General Partner.
USRP may retain otherwise distributable cash flow to the extent the Managing
General Partner deems appropriate.
Net proceeds from financing and sales or other dispositions of the
Company's properties are allocated 98.02% to the Unitholders and 1.98% to the
Managing General Partner until the Unitholders have received an amount equal to
the Unrecovered Capital Per Unit plus a cumulative, simple return equal to 12%
of the balance of their Unrecovered Capital Per Unit outstanding from time to
time (to the extent not previously received from distributions of prior capital
transactions); then such proceeds are allocated 75.25% to the Unitholders and
24.75% to the Managing General Partner until the Unitholders have received a
total cumulative, simple return equal to 17.5% of the Unrecovered Capital per
Unit; and then such proceeds are allocated 60.4% to the Unitholders and 39.6%
to the Managing General Partner. USRP may retain otherwise distributable net
proceeds from financing and sales or other dispositions of the Partnership's
properties to the extent the Managing General Partner deems appropriate.
THE ACQUISITION PRICE
The Acquisition Price consists of two components: (i) the Initial Share
Consideration and (ii) the Contingent Share Consideration. The Acquisition
Price consists of two components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being diluted from the
issuance of the Acquisition Shares and to enable the Special Committee to
establish a price to be paid for the Operating Partnership General Partner
Interest and the USRP Interest which cannot be valued with certainty. The
Initial Share Consideration is equal to the value of 850,000 shares of Common
Stock (subject to adjustment in the event of certain dilutive events, as more
fully described below), and shall consist of shares of Common Stock, Units
and/or an interest in the Operating Partnership, depending upon how the
Conversion is effected (collectively, the "Initial Shares"). The Initial
Shares shall be issued by the REIT Corporation, USRP or the Operating
Partnership as applicable, as soon as practicable following the date of the
Termination, but in no event later than 30 days thereafter.
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At the time of the Termination, the officers and employees of the Managing
General Partner will become officers and employees of the REIT Corporation,
and the Managing General Partner will have no further obligation to provide
any management services to any of the REIT Corporation, USRP or the Operating
Partnership.
The Contingent Share Consideration is equal to the value of up to a
maximum number of 550,000 shares of Common Stock, and shall consist of Units
and/or an interest in the Operating Partnership, depending upon how the
Conversion is effected (collectively, the "Contingent Shares" and, together
with the Initial Shares, the "Acquisition Shares") (which number or
classification shall be adjusted to give effect to any dividend or distribution
of shares of capital stock, rights or warrants to the holders of Common Stock,
any reclassification or change of the shares of Common Stock, including,
without limitation, a stock split, or any merger or consolidation of the REIT
Corporation or USRP or sale of assets to another corporation, any which occurs
after the date of the Termination). The exact number of Contingent Shares to
be issued will be determined by dividing the (i) amount by which the MGP Net
Income (as defined below) for fiscal year 2000 of the Operating Partnership
exceeds $3,612,500 by (ii) $4.25, and rounding the resulting number up to the
nearest whole number. "MGP Net Income" means the dollar amount of fees and
distributions which would otherwise have been payable to the Managing General
Partner in the year 2000 by the Operating Partnership and USRP pursuant to the
Operating Partnership General Partner Interest and the USRP Interest had the
Managing General Partner operated the Operating Partnership on a continuous
basis from the date of the Termination through December 31, 2000, less
$775,000.
For example, if the MGP Net Income for the year 2000 is $5,100,000
($5,875,000 less $775,000) then the Contingent Share Consideration would be
350,000 Contingent Shares.
The Contingent Shares, if any, shall be issued by USRP or the Operating
Partnership, as applicable, as soon as practicable following the end of fiscal
year 2000, but in no event later than March 31, 2001. The Managing General
Partner will not receive any dividends with respect to the Contingent Shares,
or otherwise have any rights with respect thereto, until they are issued.
REIT CORPORATION OFFICER COMPENSATION
Each of Mr. Stetson and Mr. Margolin shall enter into employment
agreements with the REIT Corporation as of the date of the Termination. These
employment agreements will provide, among other things, that each of them will
have the same positions, responsibilities and authority that each currently
holds as an officer of the Managing General Partner. Additionally, each
employment agreement will specifically provide that prior to December 31, 2000,
neither Mr. Stetson nor Mr. Margolin will receive cash compensation (I.E.,
excluding the value of any equity-based compensation, such as stock options or
shares of restricted stock) in excess of $300,000 per year. See "Management--
Employment Agreements."
WITHDRAWAL AGREEMENT
The Termination will be effected pursuant to an agreement (the "Withdrawal
Agreement") to be entered into by and among the Managing General Partner, the
REIT Corporation and the
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Operating Partnership. Pursuant to the Withdrawal Agreement, the Managing
General Partner will agree not to sell the Initial Shares or the Contingent
Shares for a period of two years from the respective date of receipt thereof.
In addition, the terms of the Withdrawal Agreement shall provide that in the
event of a "change in control" (as defined in the Withdrawal Agreement) of
the REIT Corporation at any time prior to December 31, 2000 all 550,000
Contingent Shares shall be issued to the Managing General Partner.
CONFLICTS OF INTEREST
In considering the recommendation of the Managing General Partner with
respect to the Conversion, the Limited Partners should be aware that a majority
of the members of the Board of Directors thereof, by virtue of their ownership
interests in and/or positions or affiliations with the Managing General
Partner, were subject to conflicts of interest in determining the Acquisition
Price. Accordingly, the Special Committee was appointed to negotiate the
Acquisition Price on behalf of the Unitholders.
ANALYSIS OF THE SPECIAL COMMITTEE
At the December 16, 1996 meeting of the Board of Directors, Messrs.
Stetson and Margolin ("Management") indicated that they planned to submit a
proposal to USRP pursuant to which either (i) the Unitholders would become
stockholders of a newly-formed self-advised REIT that would indirectly own the
assets currently owned by the Partnerships, or (ii) the Partnerships would
become self-advised. Management indicated that such proposal would address the
consideration that the Managing General Partner would receive in connection
with its withdrawal as managing general partner of the Partnerships and the
conversion of the Operating Partnership General Partner Interest or the
assignment of such interest to USRP (depending upon how the Conversion is
effected) and the conversion of the USRP Interest. Because of the conflict of
interest caused by the fact that four of the six directors of the Managing
General Partner are also stockholders of the Managing General Partner, the
Board of Directors appointed Gerald H. Graham and Eugene G. Taper (the two
directors who are not stockholders of the Managing General Partner) to serve as
members of a special committee (the "Special Committee") to make a
recommendation to the Board of Directors as to whether or not it considered the
Acquisition Price to be fair, from a financial point of view, to the Limited
Partners. The Board of Directors appointed Dr. Graham as Chairman of the
Special Committee, agreed to pay the members of the Special Committee $5,000
each for serving as members of the Special Committee, authorized the Special
Committee to engage (at USRP's expense) legal counsel to represent the Special
Committee and a financial advisor to advise the Special Committee, and agreed
to reimburse the members of the Special Committee for expenses that they
incurred serving on the Special Committee. The Special Committee selected and
engaged legal counsel.
The Special Committee engaged Morgan Keegan as financial advisor to the
Special Committee. Morgan Keegan is an investment banking firm that regularly
renders valuations of businesses and securities in connection with mergers and
acquisitions, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for various purposes.
The Special Committee interviewed four investment banking firms as
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candidates to be the financial advisor to the Special Committee. The Special
Committee selected Morgan Keegan because of its extensive experience with
real estate investment trusts, both as a managing underwriter of public
securities offerings by REITs and acting as a financial advisor in connection
with mergers and acquisitions involving REITs, and because Morgan Keegan was
familiar with USRP and the Managing General Partner, having served as
managing underwriter in connection with USRP's June 1996 public offering and
as a financial advisor to USRP in connection with such offering.
On December 30, 1996, Management submitted a proposal to the Special
Committee that provided for a formula pursuant to which the Managing General
Partner would receive partnership units (i) upon the closing of the transaction
based on the net income of the Managing General Partner prior to the closing
and (ii) for each of the 10 quarters thereafter based on the growth in funds
from operations before interest of USRP for such 10 quarters. Morgan Keegan
indicated to the Special Committee that based on projections provided by
Management, the Managing General Partner would receive approximately 1,700,000
shares under such proposal if USRP were to meet its projections. The Special
Committee rejected this proposal.
On January 10, 1997, Management submitted a new proposal to the Special
Committee pursuant to which the Managing General Partner would withdraw as the
managing general partner of the Partnerships and convert the Operating
Partnership General Partner Interest or assign such interest to USRP (depending
upon how the Conversion is effected) and convert the USRP Interest in exchange
for 1,630,000 shares issued over time as follows: 640,000 shares on or before
September 30, 1997, 220,000 shares on or before January 1, 1998 and 110,000
shares for each of the next seven quarters.
The Special Committee held two meetings with its legal counsel and
financial advisor to consider the January 10, 1997 proposal. On January 15,
1997, the Special Committee rejected that proposal and submitted a proposal to
Management pursuant to which the Managing General Partner would convert the
Operating Partnership General Partner Interest or assign such interest to USRP
(depending upon how the Conversion is effected) and convert the USRP Interest
in exchange for 1,100,000 shares, of which 900,000 shares would be issued at
the closing and 200,000 shares would be issued if USRP (or the REIT
Corporation) achieved projected funds from operations per unit for the year
ended December 31, 1998. The offer was made subject to the execution and
delivery of documentation that is satisfactory to the Special Committee to
implement the Conversion and to the condition that satisfactory arrangements
are made so that a Unitholder who wants to sell in the open market after the
Conversion will be able to convert his or her Units to Common Stock and sell
such Common Stock with the same speed he or she can presently sell Units (I.E.,
the conversion and subsequent sale will be transparent to the Unitholder).
The Special Committee and Management then met on January 16, 1997 and
negotiated the terms of the proposal. Although the Special Committee and
Management did not agree upon terms at that meeting, they agreed to seek to
negotiate a proposal within the following framework: (i) a certain number of
shares would be issued at closing, and (ii) additional shares (up to a stated
maximum number) would be issued based on what the Managing General Partner
would have received based on the Operating Partnership General Partner
Interest. The
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discussions ranged between 1,300,000 shares and 1,600,000 shares and varied
with regard to timing, the number of shares that would be guaranteed and the
number of shares that would be contingent and the basis upon which contingent
shares would be issued. The Special Committee also introduced the concept of
having the Managing General Partner agree not to sell the shares received
upon the closing of the Termination for a two-year period after closing and
Management's agreement that their cash compensation as employees of the REIT
Corporation would not exceed a certain level for a certain period of time
after the closing. Management introduced the concept of providing a
mechanism for the Managing General Partner to receive the contingent shares
if the REIT Corporation were acquired prior to the end of the period that
would be used to determine the number of contingent shares to be issued.
The Special Committee and Management continued negotiations for several
days, and on January 22, 1997, Management presented a proposal to the Special
Committee. The Special Committee requested additional detail with regard to
certain issues. On January 27, 1997, Management submitted a more detailed
proposal to the Special Committee and followed up in a telephone conference
with certain additional details (collectively, the "January 27, 1997
Proposal"), the primary terms of which are as follows:
1. The Managing General Partner would convert the Operating
Partnership General Partner Interest or assign such interest to USRP
(depending upon how the Conversion is effected) and convert the USRP
Interest at the earlier of the effectiveness of the initial public
offering by the REIT Corporation (the "IPO") or August 31, 1997,
unless a later date was agreed upon by the Special Committee and the
Managing General Partner.
2. The Managing General Partner would receive 850,000 Units (or
such number of shares of Common Stock as a holder of 850,000 Units
would receive in the Conversion or an interest in the Operating
Partnership equal in value to 850,000 Units that would be convertible
into or exchangeable for such number of shares of Common Stock as a
holder of 850,000 Units would receive in the Conversion, depending
upon how the Conversion is effected) for the conversion of the
Operating Partnership General Partner Interest and the USRP Interest.
3. The Managing General Partner might also receive additional
consideration equal in value to up to 550,000 Units (or such number
of shares of Common Stock as a holder of 550,000 Units would receive
in the Conversion or an interest in the Operating Partnership equal
in value to 550,000 Units that would be convertible into or
exchangeable for such number of shares of Common Stock as a holder of
550,000 Units would receive in the Conversion, depending upon how the
Conversion is effected) but only if the management/general partner
fees and distributions that the Managing General Partner would have
received if the arrangements that are currently in place had not been
terminated, reaches or exceeds certain levels in the year ending
December 31, 2000. For every $4.25 of management/general partner
fees and distributions which would have been earned in the year
ending December 31, 2000, the Managing General Partner would receive
one Contingent Share (allowing for splits, etc.) less the Initial
Shares
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already received (850,000) subject to a maximum 550,000
Contingent Shares. For the purposes of this calculation, the
management/general partner fees and distributions will be the
management/general partner revenues which would have been received
during the year ending December 31, 2000 as prescribed by the
Partnership Agreements less $775,000, which are the projected
expenses of the Managing General Partner in the year 2000 which would
then be incurred by the REIT Corporation or USRP. If the REIT
Corporation or USRP, as applicable, is acquired by an unrelated third
party prior to December 31, 2000 and pursuant to that acquisition
there is a change in control of the REIT or USRP, as applicable, the
entire maximum contingent share consideration would be issued to the
Managing General Partner at the time of such acquisition.
4. Messrs. Stetson and Margolin would agree not to receive annual
cash compensation as employees of the REIT Corporation or the
Partnerships of more than $300,000 each in each year up to and
including the year ending December 31, 2000.
5. The Managing General Partner would agree not to sell the 850,000
Initial Shares it receives until at least two years after receipt
thereof and not to sell any of the Contingent Shares until December
31, 2002.
6. The Managing General Partner indicated that the relevant
documentation to evidence the issuance of the Acquisition Shares to
the Managing General Partner would be in form that was satisfactory
to the Special Committee, and that satisfactory arrangements would be
made to ensure that a Unitholder who wants to sell in the open market
after the closing of the Conversion would be able to convert his or
her Units to shares of Common Stock (if applicable) and sell such
shares of Common Stock with the same speed he or she can presently
sell partnership units (I.E., the conversion and subsequent sale
would be transparent to the Unitholder).
On February 5, 1997, the Special Committee met and Morgan Keegan made a
presentation and gave its oral opinion to the Special Committee that the
Acquisition Price set forth in the January 27, 1997 Proposal was fair, from a
financial point of view, to the Unitholders. At that February 5, 1997 meeting,
the Special Committee recommended to the Board of Directors of the Managing
General Partner that it considered the Acquisition Price set forth in the
January 27, 1997 Proposal to be fair, from a financial point of view, to the
Unitholders. The Special Committee conditioned its recommendation on the
issuance by Morgan Keegan of an additional fairness opinion on the date of this
Proxy Statement/Prospectus to the effect that as of the date of the Proxy
Statement/Prospectus the Acquisition Price proposed to be issued to the
Managing General Partner was fair, from a financial point of view, to the
Unitholders.
In addition to considering Morgan Keegan's fairness opinion in making its
recommendation, the Special Committee also considered the structure of the
Acquisition Price, in that the Managing General Partner would receive all or a
portion of the Contingent Shares if and only if the MGP Net Income for the year
ending December 31, 2000 reaches or exceeds
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certain levels. The Special Committee concurred with Morgan Keegan's
determination that the most appropriate methodology to determine the fairness
of the Acquisition Price was to determine the present value to the
Partnerships of the fees that it would have to pay to the Managing General
Partner but for the Termination. The Special Committee recognized the
difficulty of determining the present value to the Partnerships of being
relieved of their obligations under the Operating Partnership General Partner
Interest and the USRP Interest because the amounts that would be paid under
the Operating Partnership General Partner Interest and the USRP Interest in
the future depend, in large part, on the future growth and performance of the
Company. In determining the present value to the Partnerships of such fees
and distributions, the Special Committee looked at the historical level of
fees and distributions paid annually by the Partnerships to the Managing
General Partner, as well as management's projections for those fees and
distributions. Because of the uncertainty relating to actual amounts that
would be payable in the future under the Operating Partnership General
Partner Interest and the USRP Interest, the Special Committee considered
favorably the fact that Contingent Share Consideration was based on the fees
and distributions that would have been payable to the Managing General
Partner in the year ending December 31, 2000. As such, the Contingent Share
portion of the Acquisition Price provides a mechanism for the consideration
to be paid by the Company to correlate to the obligations the Company is
being relieved of under the Operating Partnership General Partner Interest
and the USRP Interest. The Special Committee also considered favorably the
facts that (i) there is a cap on the maximum number of Contingent Shares that
could be issued, and (ii) the base year for considering the Contingent Shares
is three years from now.
Additionally, the Special Committee considered the fact that the Managing
General Partner was being relieved of its obligation to provide management
services. The Special Committee considered favorably several factors that it
hoped would give Messrs. Stetson and Margolin additional incentive to achieve
superior long-term results for the Company including (i) the Contingent Share
issuance would be based on events occurring in the year 2000 and (ii) the
Managing General Partner agreed not to sell the Initial Shares until at least
two years after receipt thereof and not to sell any of the Contingent Shares
until December 31, 2002. The Special Committee also considered favorably that
each of Messrs. Stetson and Margolin agreed not to receive annual cash
compensation as employees of the REIT Corporation or the Partnerships of more
than $300,000 in each year up to and including the year ending December 31,
2000.
FAIRNESS OPINION
MORGAN KEEGAN FAIRNESS OPINION
The Special Committee retained Morgan Keegan to act as its financial
advisor and to render its opinion concerning the fairness to the Unitholders,
from a financial point of view, of the Termination, the transaction whereby the
Managing General Partner will withdraw as managing general partner of the
Partnerships, and convert its Operating Partnership General Partner Interest
and convert the USRP Interest in exchange for the Acquisition Price pursuant to
the Withdrawal Agreement. Morgan Keegan did not recommend to USRP that any
specific consideration would constitute the appropriate consideration to be
paid.
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At a meeting of the Special Committee held on February 5, 1997, Morgan
Keegan made a presentation and gave its oral opinion to the Special Committee
that the Acquisition Price is fair, from a financial point of view, to the
Unitholders. In addition, Morgan Keegan confirmed, in a written opinion dated
as of the date of this Proxy Statement/Prospectus that, as of such date, the
Acquisition Price is fair, from a financial point of view, to the Unitholders
(the "Fairness Opinion"). The Fairness Opinion addresses the transaction to
which it relates in the context of the information available on that date.
Events occurring after the date may materially affect the assumptions used in
preparing the Fairness Opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN ARRIVING AT SUCH OPINION, THE
ASSUMPTIONS MADE AND THE LIMITS OF ITS REVIEW, IS ATTACHED HERETO AS APPENDIX
B, AND IS INCORPORATED HEREIN BY REFERENCE. UNITHOLDERS ARE URGED TO REACH
SUCH OPINION IN ITS ENTIRETY. MORGAN KEEGAN'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS TO THE UNITHOLDERS, FROM A FINANCIAL POINT OF VIEW, OF THE ACQUISITION
PRICE. THE FAIRNESS OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE
TRANSACTION OR RELATED REIT CONVERSION AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY UNITHOLDER AS TO HOW SUCH UNITHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE OPINION OF MORGAN KEEGAN SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
EXPERIENCE OF MORGAN KEEGAN
Morgan Keegan is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for various
purposes. The Special Committee selected Morgan Keegan as its financial
advisor on the basis of such experience and expertise in transactions similar
to the Termination and Morgan Keegan's familiarity with the real estate and
REIT industries.
SUMMARY OF MATTERS CONSIDERED
In arriving at its opinion, Morgan Keegan reviewed (i) this Proxy
Statement/Prospectus as originally filed with the Commission on February 7,
1997, (ii) the Partnership Agreements (and the proposed amendments thereto) and
(iii) an unexecuted draft of the Withdrawal Agreement (which, for purposes of
its analysis, it assumed that any further revisions, including the filling in
of blank spaces and the attachment of final exhibits and appendices, would not
materially alter the terms and provisions of such documents and that such
documents would be executed as finalized) and certain publicly-available
financial information and internal financial analyses concerning USRP and the
Operating Partnership and internal financial analyses concerning the Managing
General Partner and held discussions with members of senior management of USRP
and the Managing General Partner regarding the business and prospects of the
companies and the business and prospects of the USRP on a self-advised basis.
In
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addition, Morgan Keegan reviewed the reported price and trading volume of the
Units since the Acquisition Price will be paid in Units (or a proportional
number of shares of Common Stock or a proportionate ownership interest in the
Operating Partnership, depending upon how the Conversion is effected).
Although Morgan Keegan did not undertake a detailed analysis of the reported
price and trading volume of the Units, based on its experience and knowledge
of USRP and comparable companies, it believed that the Units were fairly
valued at the time of its opinion, and that the current price and trading
volume supported the conclusion reached in its opinion. Morgan Keegan also
compared certain financial information of the Managing General Partner with
similar information for certain selected companies engaged in the real estate
management industry whose securities are publicly traded, reviewed the
financial terms of selected recent business combinations, reviewed certain
pro forma analyses regarding the business and prospects of USRP after the
Termination and performed such other studies and analyses as Morgan Keegan
considered appropriate. Morgan Keegan was not asked to consider or provide
an opinion, and is not expressing any opinion, with respect to (i) the
fairness of the Conversion, other than the Acquisition Price, (ii) the
fairness of the Acquisition Price from any point of view other than from a
financial point of view, (iii) the fairness of any other alternative
transaction or structures available to USRP or the Operating Partnership with
respect to the acquisition or withdrawal of the Managing General Partner or
any other transaction involving the Managing General Partner, or (iv) the
effect of federal, state or other tax laws, rules or regulations on the USRP
or any other party to the Conversion arising from the Termination and
Withdrawal Agreement and related transactions.
SCOPE OF OPINION
The scope of Morgan Keegan's opinion was limited to the fairness to the
Unitholders, from a financial point of view, of the Acquisition Price. Morgan
Keegan did not undertake an analysis nor give an opinion with respect to the
fairness to the Unitholders, from a financial point of view, of the Merger
Alternative or the Exchange Alternative.
ASSUMPTIONS
In connection with its review and analysis and in arriving at its opinion,
Morgan Keegan assumed the accuracy, completeness and fairness of any
information provided to or otherwise reviewed by Morgan Keegan, including,
without limitation, this Proxy Statement/Prospectus, and relied upon such
information being complete and accurate in all respects. Morgan Keegan did not
independently verify any of such information. Morgan Keegan also assumed the
correctness of and relied upon the representations and warranties of all
parties contained in the Withdrawal Agreement. Morgan Keegan also relied upon
the judgment of the management of the Managing General Partner as to the
reasonableness and achievability of the financial and operating projections and
the assumptions and bases therefore provided to it, and assumed that such
projections reflected the best currently available estimates and judgment of
the management of the Managing General Partner and that, subject to reasonable
discounts attributable to the likelihood of achieving such results, such
projections and forecasts would be realized in the amounts and time period then
estimated by the management of the Managing General Partner. Morgan Keegan was
not engaged to assess the achievability of such projections or assumptions.
Morgan Keegan was not engaged to, and did not conduct a physical inspection or
appraisal of
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any of the assets, properties or facilities of either USRP, the Operating
Partnership or the Managing General Partner, nor was it furnished with any
such evaluation or appraisal. Morgan Keegan assumed that the conditions to
the Termination and the Withdrawal Agreement would be satisfied.
ANALYSIS AND CONCLUSION
The following is a summary of the financial and comparative analyses
performed by Morgan Keegan in connection with the preparation of the Fairness
Opinion:
The Termination is structured as the withdrawal of the Managing General
Partner as the managing general partner of the Partnerships and the amendment
of the Partnership Agreements to provide for the conversion of the Operating
Partnership General Partner Interest or the assignment of such interest to USRP
(depending upon how the Conversion is effected) and the conversion of the USRP
Interest. In consideration of the Managing General Partner's agreement to
withdraw as the general partner and to convert the Operating Partnership
General Partner Interest or assign such interest to USRP (depending upon how
the Conversion is effected) and convert the USRP Interest, the Managing General
Partner will initially receive the Initial Share Consideration, consisting of
850,000 Units (or such number of shares of Common Stock as a holder of 850,000
Units would receive in the Conversion or an interest in the Operating
Partnership equal in value to 850,000 Units that would be convertible or
exchangeable for such number of shares of Common Stock as a holder of 850,000
Units would receive in the Conversion, depending upon how the Conversion is
effected). Additionally, the Managing General Partner has the right to receive
the Contingent Share Consideration, consisting of 550,000 Units (or such number
of shares of Common Stock as a holder of 550,000 Units would receive in the
Conversion or an interest in the Operating Partnership equal in value to
550,000 Units that would be convertible or exchangeable for such number of
shares of Common Stock as a holder of 550,000 Units would receive in the
Conversion, depending upon how the Conversion is effected) at December 31,
2000, if certain cash flow targets are attained. Morgan Keegan estimates the
present value of the Acquisition Price to be between $28 million and $34
million, giving effect to the restrictions on transfer applicable to the units
(or shares) being issued, the probability that the cash flow targets necessary
to earn the Contingent Shares will be attained and the fact that no dividends
will be paid on the Contingent Shares until they are earned.
In determining the fairness of the Acquisition Price from a financial
point of view, to the Unitholders, Morgan Keegan endeavored to value the fees
that would be payable by the Partnerships to the Managing General Partner but
for the Termination. Because the Termination does not involve the acquisition
of the Managing General Partner, some of the traditional valuation
methodologies were less appropriate than others.
Morgan Keegan determined that the most appropriate methodology was to
determine the present value to the Partnerships of the fees that it would have
to pay to the Managing General Partner but for the Termination. In determining
the present value to the Partnerships of these fees, Morgan Keegan looked at
the historical level of fees paid annually by the Partnerships to the Managing
General Partner, as well as management's projections for those fees, which are
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largely a function of the growth and performance of the Partnerships. In
addition to valuing the management fees payable to the Managing General
Partner, Morgan Keegan analyzed the likely effect on the Partnerships as a
result of the Termination in terms of funds from operations per share.
In performing its analysis, Morgan Keegan considered a variety of
valuation methodologies, including: (i) discounted cash flow analysis, (ii)
comparable company analysis, and (iii) comparable transaction analysis.
Morgan Keegan also analyzed the Termination utilizing a pro forma merger
analysis and a contribution analysis.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Keegan used a discounted cash flow
analysis to value the future stream of fees that would have been payable to the
Managing General Partner had the Termination not occurred. Morgan Keegan
performed a discounted cash flow analysis of the projected cash flow (unlevered
net income) of the Managing General Partner for fiscal years 1997 through 2001,
based on operating projections provided by USRP and the Managing General
Partner. The Company's operating projections indicated projected cash flow of
the Managing General Partner for each of the fiscal years 1997 through 2001, of
approximately $2.3 million, $4.4 million, $6.6 million, $8.3 million and $9.9
million, respectively. In determining these amounts, Morgan Keegan took into
account certain expenses historically paid by the Managing General Partner that
would be paid by the REIT Corporation upon consummation of the Termination,
including salaries and general and administrative expenses. Using this
information, Morgan Keegan calculated a range of equity values for the Managing
General Partner based on the sum of (i) the present value of the free cash
flows of the Managing General Partner and (ii) the present value of the
estimated terminal value for the Managing General Partner assuming that it was
sold at the end of fiscal year 2001. In performing its discounted cash flow
analysis, Morgan Keegan assumed, among other things, discount rates ranging
from 10% to 27.5% (depending on the predictability of the income from various
fees under the Property Management Contract) and terminal multiples of EBIT of
6.0x to 9.0x. Those discount rates and terminal multiples reflect Morgan
Keegan's qualitative judgments concerning the specific risk associated with
such an investment and the historical and projected operating performance of
the Managing General Partner. This analysis resulted in a range of equity
values for the Managing General Partner of $33.9 million to $56.5 million.
Morgan Keegan focused its analysis on the midpoint of these discount rates and
terminal multiples. Such analysis implied an equity value range for the
Managing General Partner of $40.3 million to $47.8 million.
COMPARABLE COMPANY ANALYSIS. Morgan Keegan also analyzed selected
publicly-traded real estate companies engaged primarily as managers and
advisors in the real estate business. Morgan Keegan considered the following
companies: CB Commercial Holdings, Grubb & Ellis Company, Hallwood Realty
Partners, Inc., Insignia Financial Group, Inc. and NHP, Inc. Morgan Keegan
compared the market value of each, as determined by the closing price recorded
for each company's common stock, with each company's revenue, net income,
EBITDA and EBIT. In addition, Morgan Keegan determined the market value and
the adjusted market value of each comparable company and calculated trading
multiples based on revenue, EBITDA, EBIT and net income. Based on the median
multiples of the comparable companies, this analysis resulted in a range of
equity values for the Managing General Partner of $3.4 million to $47.0
million. Morgan Keegan focused its analysis on EBIT and on EBITDA and
determined a range of $20
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million to $50 million. No company used in this group of comparable
companies was similar to the Managing General Partner in terms of the fee
structure and income stream payable under the Operating Partnership General
Partner Interest, and the companies all are larger and more diversified than
the Managing General Partner. Accordingly, these comparable companies did
not provide a meaningful method of valuing the Managing General Partner.
COMPARABLE ACQUISITIONS. Morgan Keegan also compared the Termination with
acquisitions by selected public companies engaged primarily in the real estate
management, development and acquisition business. Under this approach, Morgan
Keegan considered, among others, the acquisitions of Security Management
Corporation, ConCap, O'Donnell Property Services, Allegiance Realty Group,
National Property Investors and Angeles Corporation by Insignia Group, Inc.,
the acquisition of BT Venture Corporation by Boddie-Noell Properties, Inc. and
the consolidation of Franchise Finance Corporation of America with existing
related real estate limited partnerships. Morgan Keegan determined the
multiples of market value and adjusted market value to revenue, EBITDA, EBIT
and net income for each of these companies. Morgan Keegan then applied these
multiples to the revenue, EBITDA, EBIT and net income of the Managing General
Partner. Morgan Keegan also considered other financial and other operating
characteristics of these companies in its analysis.
Morgan Keegan also reviewed certain acquisitions of real estate advisory
and management companies by publicly traded REITs. This review included
calculating the multiples obtained by comparing the prices paid to acquire such
companies with the advisory fees earned by the acquired companies during the
last full fiscal year prior to the REIT's becoming self-advised. Under this
approach, Morgan Keegan considered Bradley Real Estate Trust, Boddie-Noell
Properties, Inc., Burnham Pacific Properties, Inc., Meditrust, Health Care
REIT, Inc., Storage Equities, Inc., Shurgard Storage Centers, Inc., Realty
Income Corporation, Mid-America Apartment Communities, Inc., Summit Properties,
Associated Estates Realty Corporation, Paragon Group, Inc. and Criimi Mae Inc.
Based on the multiples of revenue, EBITDA, EBIT, funds from operations and net
income of the comparable transactions, this analysis resulted in a range of
values for the Managing General Partner of $3.6 million to $70.8 million.
Morgan Keegan focused its analysis on the median range of values which resulted
in a range of values for the Managing General Partner of $15.0 million to $30.0
million. Morgan Keegan also considered other financial and operating
characteristics of these companies in its analysis. No company or transaction
was similar to the Managing General Partner in terms of the fee structure and
income stream payable under the Partnership Agreements. Accordingly, these
comparable companies did not provide a meaningful method of valuing the
Managing General Partner.
PRO FORMA MERGER ANALYSIS. Morgan Keegan also analyzed the effect of the
Termination on the financial projections of the Partnerships based on the
Acquisition Price to be paid to the Managing General Partner pursuant to the
Withdrawal Agreement. USRP's stand alone projections for 1997 through 2000
were compared with pro forma combined company projections for funds from
operations and other measures of profitability in order to determine the degree
of dilution, if any, to the Unitholders subsequent to the Termination. This
analysis indicated that the Termination should be accretive to pro forma
combined company's funds from operations for each year from 1997 through 2000.
For the purposes of this analysis, funds from operations were calculated in a
manner consistent with the Partnerships' current policy.
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CONTRIBUTION ANALYSIS. Morgan Keegan analyzed the contribution of the
Partnerships and the Managing General Partner to the projected 1997 through
2000 operating results of the pro forma combined company. Morgan Keegan
calculated the percentage contribution for each entity relative to total
income, EBIT, net income and funds from operations of the pro forma combined
company. Morgan Keegan then calculated the percentage ownership on a
post-transaction basis for both existing Unitholders and the Managing General
Partner. Morgan Keegan concluded that from the Unitholders' perspective, the
Managing General Partner's percentage contribution to total income, EBIT, net
income and funds from operations compares favorably with its proposed
percentage ownership of the pro forma combined company.
Based on the foregoing, Morgan Keegan concluded that, based on various
assumptions and considerations, the Acquisition Price is fair, from a financial
point of view, to the Unitholders.
The summary set forth above does not purport to be a complete description
of the presentation by Morgan Keegan to the Special Committee or of the
analyses performed by Morgan Keegan. The preparation of a fairness opinion is
not necessarily susceptible to partial analysis or summary description. Morgan
Keegan believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the above summary, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses presented to the Special Committee set forth in Morgan Keegan's
fairness opinion. In addition, Morgan Keegan may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to represent the actual value of the payments to the Managing General
Partner or the combined company.
In performing its analyses, Morgan Keegan made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Partnerships or the
Managing General Partner. The analyses performed by Morgan Keegan are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of Morgan Keegan's analysis of the
fairness, from a financial point of view, of the Acquisition Price and were
discussed with the Special Committee. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future. In addition, as described above, Morgan Keegan's
presentation to Special Committee and its Fairness Opinion was one of many
factors taken into consideration by the Special Committee in making its
determination to approve the Acquisition Price.
COMPENSATION AND MATERIAL RELATIONSHIPS
The Special Committee has engaged Morgan Keegan to provide investment
banking advice and services in connection with the Special Committee's review
and analysis of the Termination. USRP agreed to pay Morgan Keegan: (i) a fee
of $50,000 upon execution of an engagement letter, and (ii) a fee of $175,000
at the time of delivery of the Fairness Opinion.
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USRP has also agreed to reimburse Morgan Keegan for reasonable out-of-
pocket expenses, including fees and disbursements of counsel, incurred by
Morgan Keegan in carrying out its duties under the engagement letter, and to
indemnify Morgan Keegan for certain liabilities to which it may be subjected
in connection with its engagement.
In addition to rendering the opinion, Morgan Keegan has in the past
provided investment banking services to USRP, for which it received customary
fees. In June 1996, Morgan Keegan acted as the lead manager of the
Partnership's 1,800,000 Unit offering. In addition to the underwriting fees
and commissions of approximately $1.2 million, USRP paid Morgan Keegan a
financial advisory fee of $200,000. In May 1996, an affiliate of Morgan Keegan
provided a $20 million mortgage warehouse facility to USRP in exchange for
interest payments on amounts outstanding thereunder at a rate of 300 basis
points over LIBOR. This facility was paid in full in January 1997. In the
ordinary course of its business, Morgan Keegan may trade the Units for its own
account and for the account of its customers and may at any time hold a short
or long position in such securities. Morgan Keegan has expressed no opinion as
to the prices or trading range at which the Units may trade following the date
of its opinion or upon completion of the Termination.
ANALYSIS OF ALTERNATIVES CONSIDERED
CONTINUATION OF USRP
In reaching its decision to recommend the Conversion to the Unitholders,
the Board of Directors considered the alternative of continuing USRP in its
current form as a master limited partnership. The Board of Directors
determined, however, that based on the reasons discussed above under "--
Advantages of the Conversion," proceeding with the Conversion would be more
beneficial to the Unitholders than the alternative of continuing USRP in its
existing form. The Managing General Partner believes these advantages outweigh
the disadvantages discussed under the caption "--Disadvantages of the
Conversion." In reaching its decision to recommend the Conversion, the
Managing General Partner did not consider any other alternative to the
Conversion or any other means of accomplishing the intended result thereof.
LIQUIDATION OF USRP
With respect to the alternative of liquidating USRP, the Board of
Directors concluded that, based on the estimated liquidation value per Unit
($20.00, determined as set forth below under "--Comparison of Values"), such
alternative was less favorable to the Unitholders than the receipt of shares of
Common Stock, assuming the Common Stock trades at a price per share comparable
to the current trading price per Unit ($28.50 at April 25, 1997), although no
assurance can be given that such a trading price will result. See "Risk
Factors--Substitution of Trading of Common Stock for Units."
COMPARISON OF VALUES
CONTINUATION OF USRP
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A comparison of the value that will be received by the Unitholders upon
consummation of the Conversion as opposed to the value of the Units that would
be held if USRP continued as a partnership depends upon the relative market
prices of the Units and the shares of Common Stock. If the market price of the
Units and the shares of Common Stock is similar, then the market value of the
individual Unitholder's investment would be substantially similar if the
Conversion were completed or if USRP continued in its existing format. It is
impossible to determine the market's reaction to the Conversion and no
assurances can be given that the value of an individual Unitholder's investment
will not be materially adversely affected by the Conversion. If the shares of
Common Stock after the Conversion have a market value less than the Units
before the Conversion, then the market value of the Unitholder's investment
would be proportionately reduced. In addition, adverse tax consequences that
may be incurred by certain Unitholders as a result of the Conversion could
affect the calculation of comparative value for such Unitholders.
LIQUIDATION OF USRP
A comparison of the value that will be received by a Unitholder upon
consummation of the Conversion as opposed to the value of what a Unitholder
would receive upon a liquidation of USRP depends primarily upon the market
price of the shares of Common Stock and the net proceeds that could be realized
from a sale of the Company's properties. The value of the shares of Common
Stock received upon completion of the Conversion would be calculated by
multiplying the number of shares of Common Stock held by the market price of
such shares. The resulting amount would be the value received by the
Unitholder as a result of the Conversion. The Company does not regularly
obtain appraisals of its properties; consequently, for purposes of conducting a
liquidation analysis, the Managing General Partner aggregated the acquisition
costs of each of the Company's properties, which totalled $213 million. Based
on such total value, the Managing General Partner estimates that the
distribution per Unit from the sale of the Company's properties would equal
approximately $20.00, assuming assets, liabilities and contractual
arrangements, as they existed at December 31, 1996. The actual price at which
the properties could be sold, however, cannot be determined. The actual
amount of the distribution per Unit would also depend upon costs incurred in
connection with the sale. The $20.00 per Unit value was calculated by
subtracting estimated transaction costs ($3 million) and debt ($69 million)
from the sum of the property costs ($213 million). The resulting amount was
multiplied by 98.02 to reflect the Unitholders' percentage interest in
operational distributions and divided by the number of outstanding Units
(approximately 6.9 million at December 31, 1996). The difference in value
received upon consummation of the Conversion as opposed to liquidation of the
Partnership would be the market price of the shares of Common Stock received as
compared to such liquidation value. Assuming the market price per share of
Common Stock following the Conversion is comparable to the market price per
Unit ($28.50 at April 25, 1997), the per Unit distribution of $20.00 upon
liquidation would be less than the value of the shares of Common Stock received
in the Conversion. In addition, if the properties were to be sold, the
Unitholders would not be able to receive further distributions from the
properties or any future real estate investments by the Company.
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ALLOCATION OF SHARES OF COMMON STOCK AMONG UNITHOLDERS AND THE MANAGING
GENERAL PARTNER
The Board of Directors determined, based on the fact that the REIT
Corporation will initially own the same assets as those held by USRP through
its ownership interest in the Operating Partnership, that it was appropriate
for each of the Unitholders to receive one share of Common Stock for each Unit
held by them immediately prior to the Conversion (or 7,453,250 shares of Common
Stock on account of their 99% percentage interest in USRP). Based on this
analysis, the Board of Directors concluded that the Managing General Partner
should receive 75,285 shares of Common Stock (if the Conversion is effected
through the Merger Alternative) and 1% of the outstanding Units immediately
following the Conversion (if the Conversion is effected through the Exchange
Alternative).
In order to determine the number of shares of Common Stock (or the
equivalent interest in the Operating Partnership or the equivalent number of
Units) to be issued to the Managing General Partner in connection with the
conversion or assignment of its Operating Partnership General Partner Interest,
the Board of Directors established the Special Committee to negotiate on behalf
of the Unitholders the Acquisition Price. The Managing General Partner
determined that a special committee was necessary due to the potential conflict
of interest between management of the Managing General Partner and the
Unitholders in determining the Acquisition Price. See "Risk Factors--Conflict
of Interest" and "The Conversion--Analysis of the Special Committee."
EXECUTIVE COMPENSATION
The compensation of the executive officers of the REIT Corporation is
expected to be as described under "Management--Executive Compensation." USRP
does not currently pay compensation to the executive officers of the Managing
General Partner. Instead it pays fees and makes distributions to the Managing
General Partner related to the Operating Partnership General Partner Interest
and the USRP Interest pursuant to the terms of the Partnership Agreements. The
following table sets forth (i) the historical fees and distributions paid to
the Managing General Partner for the fiscal year ended December 31, 1994, 1995
and 1996 and (ii) the estimated payments which would have been payable to
management of the Managing General Partner for such years had the Conversion
been effected on January 1, 1994 (in thousands):
<TABLE>
ESTIMATED
HISTORICAL POST-CONVERSION FEES(1)
---------------------- -----------------------
(UNAUDITED)
1994 1995 1996 1994 1995 1996
---- ---- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Payments to Managing General Partner $690 $852 $2,537 - - -
Post-Conversion management expenses(2) - - - $750 $750 $750
</TABLE>
- -------------------
(1) Assumes the Conversion was effected as of January 1, 1994.
(2) Includes annual salaries payable to each of Messrs. Stetson and Margolin
of $250. See "Management--Executive Compensation." Does not include
distributions which would have been payable to
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the Managing General Partner on account of the Initial Shares, which
(assuming the historical distributions per Unit paid for fiscal years
1994, 1995 and 1996 would have been the same after giving effect to the
issuance of the Initial Shares) would have equalled $1,369, $1,454, and
$1,645 for each of 1994, 1995 and 1996, respectively.
NO DISSENTERS' APPRAISAL RIGHTS
Limited Partners who object to the Conversion will have no dissenters'
appraisal rights (I.E., the right, instead of receiving Common Stock, to seek a
judicial determination of the "fair value" of their Units and to compel USRP to
purchase Units for cash in that amount) under state law or the Master
Partnership Agreement, nor will such rights be voluntarily accorded to the
Unitholders by the Company. Thus, approval of the Conversion by the holders of
a majority of all Units outstanding on the Record Date will bind all
Unitholders, and objecting Unitholders will have no alternative to receipt of
Common Stock other than selling their Units in the market. The Units are
currently listed on the NYSE under the symbol "USV." If the Conversion is
effected through the Merger, the Common Stock is expected to be listed on the
NYSE effective at the time the Merger is consummated. If the Conversion is
effected through the Exchange Alternative, the Common Stock is expected to be
listed on the NYSE shortly after consummation of the Conversion.
COSTS OF THE CONVERSION
The Managing General Partner estimates the total cost and expense of the
Conversion will be approximately $580,000, whether or not completed. Such
costs and expenses include registration fees, legal and accounting fees and
expenses, recording and filing expenses and printing fees and expenses. The
costs of the Conversion, whether or not successfully completed, will be paid by
USRP. Therefore, the Managing General Partner and the Unitholders will
ultimately absorb the costs of the proposal to effect the Conversion, whether
or not the Conversion is approved or completed. The following is a statement
of certain estimated fees and expenses incurred in connection with the
Conversion:
Securities and Exchange Commission fees $ 63,707
Legal fees and expenses 100,000
Special Committee fees and expenses
(including fees to its financial and legal advisors) 245,000
Accounting fees and expenses 50,000
Printing, engraving and mailing expenses 75,000
Miscellaneous (including solicitation costs) 46,293
--------
TOTAL $580,000
--------
--------
CONSEQUENCES IF CONVERSION IS NOT APPROVED
It is expected that, if the Conversion is not approved by the Limited
Partners, or if the Conversion is not consummated for any reason, the Company
will continue in its current form. No other transaction is currently being
considered by the Company as an alternative to the Conversion.
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FIDUCIARY DUTIES
As general partner of a limited partnership, the Managing General Partner
owes the Unitholders, under Delaware law, the fiduciary duties of good faith,
fairness and loyalty in handling the affairs of USRP. This fiduciary duty, to
the extent not modified by the Master Partnership Agreement, may include a duty
to refrain from self-dealing to the advantage of the Managing General Partner
at the expense of USRP. The Master Partnership Agreement generally provides
that the Managing General Partner and its affiliates may enter into
transactions with USRP, provided that the price and terms of such transaction
are fair to the Partnership and are not less favorable to USRP than those
generally prevailing with respect to comparable transactions between unrelated
parties. Thus, the fiduciary duty of the Managing General Partner may be more
limited than would otherwise be the case, absent such provisions. The Managing
General Partner believes that it has satisfied its fiduciary duties to
Unitholders in connection with the proposal of the Conversion and the
Termination. It was with due regard to its fiduciary responsibilities to USRP
and the Unitholders that the Managing General Partner concluded that a Special
Committee of the independent directors of its Board of Directors be formed to
represent properly the interests of the Unitholders in connection with the
Termination.
The Managing General Partner may also have obligations under securities
and state corporate laws to disclose all material information concerning USRP's
affairs at certain times. The Managing General Partner believes that through
quarterly and annual filings on Form 10-Q and 10-K, annual tax reporting on
Form K-1 and disclosing the information contained herein, it has satisfied its
duties to disclose all material information to Unitholders.
Following consummation of the Conversion, the directors of the Managing
General Partner will serve as the directors of the REIT Corporation. As a
general matter (and except as modified by agreement), under Maryland law, a
director's fiduciary duties to stockholders of a Maryland corporation are
substantially similar to the fiduciary duties of a general partner of a
Delaware limited partnership to its limited partners. State law applicable to
both limited partnerships and corporations provides that the duties (including
fiduciary duties) and liabilities relating thereto of a general partner to a
limited partnership or its partners or of a director to a corporation or its
stockholders, may be expanded or restricted by provisions in the applicable
partnership agreement or charter instrument. In this regard, the Master
Partnership Agreement provides that the Managing General Partner shall not be
liable to USRP or to the Unitholders for any losses incurred as a result of any
act or omission of the Managing General Partner if the conduct did not
constitute actual fraud, willful misconduct or gross negligence and the
Managing General Partner acted in a manner it believed to be in, or not opposed
to, the interests of USRP. Further, the Master Partnership Agreement provides
broad indemnification rights in favor of the Managing General Partner so long
as its conduct meets the standard referenced in the preceding sentence. With
respect to the REIT Corporation, the Articles provide that a director of the
REIT Corporation shall not be liable for any act or omission in the director's
capacity as a director, except to the extent the director is found liable for
(i) an act or omission involving active and deliberate dishonesty or (ii) a
transaction in which the director received an improper personal benefit. The
directors are broadly indemnified and held harmless so long as the liability
otherwise to be indemnified for does not result from any act or omission of
such director that
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involves actual fraud or willful misconduct or a transaction from which such
director derived an improper benefit.
The nature of fiduciary duties is an evolving area of law and it is
unclear whether or to what extent there are differences in such fiduciary
duties. However, it is possible the fiduciary duties of a director of the REIT
Corporation to its stockholders could be less than those of the Managing
General Partner to the Unitholders. Unitholders who have questions concerning
fiduciary duties should consult their legal counsel.
ACCOUNTING TREATMENT
For financial accounting purposes, the Conversion will be treated as a
reorganization of affiliated entities, with the assets and liabilities recorded
at their historical costs, except for the Termination. The cost of converting
the Operating Partnership General Partner Interest payable by the Operating
Partnership or the REIT Corporation, as the case may be, will be charged to
expense at the time of the transaction and the costs of the reorganization will
be expensed as incurred.
THE SPECIAL MEETING
The Managing General Partner has established the close of business on
April 30, 1997, as the Record Date for determining Limited Partners entitled to
notice of, and to vote at, the Special Meeting and at any adjournment thereof.
On that date, USRP had issued and outstanding ________ Units. No matters other
than the Merger Alternative, the Exchange Alternative and certain procedural
matters may be discussed or voted upon at the Special Meeting.
ELIGIBLE UNITS
The presence, in person or by proxy, of Limited Partners holding more than
50% of the total number of outstanding Units that Limited Partners hold will
constitute a quorum at the Special Meeting. A Limited Partner may hold such
Units as either the recordholder thereof or as the recordholder of a Depositary
Receipt with respect thereto. An assignee of Units that the Managing General
Partner has not admitted to USRP as a Limited Partner, however, will be unable
to vote at the Special Meeting. Such assignee's Units will also not be
considered outstanding for purposes of determining whether a quorum exists at
the Special Meeting or whether the requisite number of Limited Partners approve
the Conversion. Additional Units acquired by a Limited Partner with respect to
which the Managing General Partner has not admitted such Limited Partner to
USRP will also not be considered outstanding for purposes of the Special
Meeting and the Limited Partner will be unable to vote such Units.
If a person beneficially owns Units through a Depositary Receipt issued to
a broker or other nominee holder, such person must instruct such broker or
nominee holder how to vote the Units that such person beneficially owns. If
such person does not give such instructions, the broker or other nominee holder
will not vote such person's Units. Failure to vote any Units on whether to
approve the Conversion will have the same effect as voting against such
proposal because its approval requires a majority of the outstanding eligible
Units to vote in its favor.
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The Managing General Partner has admitted to USRP as Limited Partners all
assignees of Units as of ____________, 1997. As of the Record Date, there were
________ Units held by Limited Partners that were eligible to vote at the
Special Meeting.
REQUIRED LEGAL OPINION
As required under the Partnership Agreements, before the Special Meeting
USRP will obtain an opinion from legal counsel that the proposed amendments to
the Partnership Agreements would not cause: (i) the loss of limited liability
of USRP under the Operating Partnership Agreement or of the Limited Partners
under the existing Master Partnership Agreement, and (ii) USRP or the Operating
Partnership to be treated as an association taxable as a corporation for
federal income tax purposes. The Managing General Partner has requested USRP's
legal counsel to render this opinion. Such legal counsel has indicated that it
will be able to render this opinion, subject to certain qualifications that the
Managing General Partner has determined are reasonable. If for some reason
such legal counsel cannot render the contemplated opinion before the Special
Meeting, the Managing General Partner would adjourn the Special Meeting to a
later date or cancel it.
REQUIRED VOTE
As required under the Partnership Agreements, the Managing General Partner
has proposed the approval of the Merger Alternative and the Exchange
Alternative and approved them in writing. For the Merger Alternative and the
Exchange Alternative to take effect, the Limited Partners must vote more than
50% of the total number of outstanding Units eligible to be voted in favor of
each of the Merger Alternative and the Exchange Alternative at the Special
Meeting.
Limited Partners will possess one vote for each Unit eligible to be voted
that they hold. Limited Partners voting against the Merger Alternative and the
Exchange Alternative will not possess any appraisal rights with respect to
their Units. See "The Conversion--No Dissenters' Appraisal Rights."
ABSTENTIONS AND BROKER NON-VOTES
The Partnership Agreements provide that with respect to Units that a
person holds for the account of another person, such as Units that a broker
holds for its client, the person holding the Units for the account of the other
person must vote the respective Units pursuant to the instructions of the
person on whose behalf it holds them. Moreover, under the rules of the NYSE,
brokers holding Units on behalf of their clients may not vote the respective
Units on whether to approve the Conversion without their clients'
authorization. A broker therefore will not vote any Units on whether to
approve the Merger Alternative and the Exchange Alternative without receiving
instructions on how to vote from such broker's client. Accordingly, there will
be no broker non-votes to consider at the Special Meeting.
With respect to the Conversion, abstentions, as well as broker non-votes,
will have the same effect as a vote against approval because more than 50% of
the total number of outstanding
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eligible Units must approve the Merger Alternative and the Exchange
Alternative, rather than just a majority of those eligible Units present at
the Special Meeting.
PROXIES
Proxyholders will vote the eligible Units represented by valid proxies at
the Special Meeting in accordance with the directions given on the Proxy Card
concerning whether to approve the Merger Alternative and the Exchange
Alternative. Moreover, the proxyholders intend to vote such Units on any
procedural matters coming before the Special Meeting in accordance with their
best judgment. Unless indicated to the contrary thereon, the directions given
on a Limited Partner's Proxy Card will be for all of such Limited Partner's
eligible Units.
IF A LIMITED PARTNER SIGNS AND RETURNS A PROXY CARD WITHOUT GIVING ANY
DIRECTIONS ON HOW TO VOTE ON THE CONVERSION, THE PROXYHOLDER WILL VOTE SUCH
LIMITED PARTNER'S ELIGIBLE UNITS FOR THE APPROVAL OF THE MERGER ALTERNATIVE AND
THE EXCHANGE ALTERNATIVE.
REVOCATION OF PROXIES
A Limited Partner may revoke its proxy at any time prior to the
proxyholder's voting of the Units to which such proxy applies by: (i)
submitting a later dated proxy to D.F. King & Company or someone else who
attends the Special Meeting, (ii) attending the Special Meeting and delivering
a written notice of revocation of the proxy to the representative of D.F. King
& Company present at the Special Meeting, or (iii) delivering a written notice
of revocation of the proxy to D.F. King & Company at 77 Water Street, New York,
New York 10005, which D.F. King & Company receives on or before June 23, 1997.
PROXY SOLICITOR
The Partnership has retained D.F. King & Company to distribute the
attached letter from the Managing General Partner, the attached notice of the
Special Meeting, this Proxy Statement/Prospectus and the Proxy Card and to
collect completed Proxy Cards. Pursuant to the requirements of the Partnership
Agreements, D.F. King & Company has mailed these documents to each Limited
Partner as of the Record Date. D.F. King & Company has also distributed them
to various banks, brokerage firms, and other custodians, nominees and
fiduciaries that may hold Depositary Receipts or Units on behalf of someone
else (collectively, the "Nominee Holders"). The Partnership will pay D.F. King
& Company a fee of approximately $20,000 for such services and reimburse it for
its out-of-pocket expenses. The Partnership will also reimburse Nominee
Holders for the reasonable expenses that they incur when forwarding the
attached letter from the Managing General Partner, the attached notice of the
Special Meeting, this Proxy Statement and the Proxy Card to the beneficial
owners of the Units.
SOLICITATIONS BY THE MANAGING GENERAL PARTNER
The directors, officers and employees of the Managing General Partner may
solicit proxies in favor of the Conversion by mail, personal interview,
telephone, facsimile transmission or other means. They will receive no
additional compensation therefor.
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION AND OTHER DATA
(DOLLARS AND UNITS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
<TABLE>
U.S. RESTAURANT
U.S. RESTAURANT PROPERTIES MASTER L.P. PROPERTIES, INC.
YEARS ENDED DECEMBER 31,(1) ----------------
-------------------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996(2)
------- ------- ------- --------- --------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statement of Income:
Total revenues $ 8,489 $ 8,332 $ 8,793 $ 9,780 $ 18,324 $ 37,719
EXPENSES:
Rent 1,187 1,295 1,348 1,405 2,080 2,524
Depreciation and amortization 1,473 1,383 1,361 1,541 3,978 9,736
Taxes, general and administrative 1,097 1,008 1,144 1,419 2,461 1,935
Interest expense (income), net 60 44 (4) 192 2,364 11,254
Provision for write down or
disposition of properties 2,186 74 11 -- -- --
------- ------- ------- -------- --------- ---------
Total expenses 6,003 3,804 3,860 4,557 10,833 25,449
------- ------- ------- -------- --------- ---------
Gain on Sale of equipment 32 32
------- ------- ------- -------- --------- ---------
Net income $ 2,486 $ 4,528 $ 4,933 $ 5,223 $ 7,473 $ 12,302
------- ------- ------- -------- --------- ---------
------- ------- ------- -------- --------- ---------
Net income allocable to Unitholders $ 2,436 $ 4,437 $ 4,834 $ 5,119 $ 7,325 N/A
Weighted average number of
Units/Shares outstanding 4,635 4,635 4,635 4,638 6,107 8,352
Net income per Unit/Share $ 0.53 $ 0.96 $ 1.04 $ 1.10 $ 1.20 $ 1.47
Cash distributions declared per
Unit applicable to respective year $ 1.54 $ 1.48(3) $ 1.61 $ 1.71 $ 1.935 N/A
CASH FLOW DATA:
Cash flow from operating activities $ 7,366 $ 7,475 $ 6,990 $ 9,288 $ 13,852 $ 23,445
Cash flow from (used in) investing
activities $ -- $ 1,130 $ -- $(12,039) $(100,978) $(179,293)
Cash flow from (used in) financing
activities $(7,542) $(8,302) $(7,569) $ 2,077 $ 87,500 $ 169,871
</TABLE>
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<TABLE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
----------------------------------------------------
DECEMBER 31,(1) DECEMBER 31, 1996
---------------------------------------------------- -----------------
U.S. RESTAURANT
PROPERTIES, INC.
1992 1993 1994 1995 1996 PRO FORMA(2)
------- ------- ------- ------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net investment in direct financing leases $24,760 $22,910 $21,237 $19,371 $ 17,105 $ 16,659
Land 23,816 23,414 23,414 27,493 61,340 81,235
Buildings and leasehold improvements, net 1,919 1,734 1,548 7,900 75,339 154,833
Equipment -- -- -- 224 2,980 2,980
Intangibles, net 17,123 15,503 14,317 13,161 12,263 11,923
Total assets 69,087 65.322 62.889 71,483 177,418 278,583
Line of credit and long term debt -- -- -- 10,931 69,486 151,858
Capitalized lease obligations 1,138 966 775 563 362 362
General partners' capital 1,429 1,357 1,308 1,241 1,163 --
Limited partners' capital 66,287 62,757 60,361 58,071 103,120 --
Stockholders' equity -- -- -- -- -- 122,496
OTHER DATA:
Number of properties 123 123 123 139 322 485
</TABLE>
- -------------------
(1) The historical information for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 was derived from USRP's audited consolidated financial
statements. USRP's audited consolidated financial statements as of
December 31, 1995 and 1996 and for each the three years in the period
ended December 31, 1996, are included elsewhere in this Proxy Statement/
Prospectus.
(2) The unaudited pro forma consolidated statement of income information for
the year ended December 31, 1996 is presented as if the following had
occurred as of January 1, 1996: (a) the purchase of 229 properties for
$133,051,000, including the value of 503,418 Units valued at $11,232,296,
completed since December 31, 1995, (b) the issuance of 1,800,000 Units in
June 1996 for net proceeds of $40,203,000, (c) the purchase of 16
properties from QSR Income Properties, Ltd. ("QSR") for 277,131 Units (at
$28.50 per Unit), (d) the purchase of 103 properties from other sellers
that as of April 17, 1997 are under binding contract for $64,148,000,
including the value of 210,526 Units valued at $6,000,000, (e) the
additional borrowings of $140,927,000 required to purchase the properties
acquired and under contract, (f) the sale of four properties for $2,892,000
and (g) the Termination. The unaudited pro forma balance sheet data as of
December 31, 1996 represents USRP's December 31, 1996 balance sheet
adjusted on a pro forma basis to reflect as of December 31, 1996: (a) the
purchase of 45 properties for $27,946,000 completed since December 31,
1996, including the value of 118,582 Units of $3,320,000, (b) the purchase
of 16 properties from QSR for 277,131 Units (at $28.50 per Unit), (c) the
purchase of 103 properties from other sellers that as of April 17, 1997 are
under binding contracts for $64,148,000, including the value of 210,526
Units valued at $6,000,000, (d) the additional borrowings of $82,372,000
required to purchase the properties acquired and under contract, (e) the
sale of four properties for $2,892,000, (f) the consolidation with the REIT
Corporation and (g) the Termination. The unaudited pro forma income
statement and balance sheet information is not necessarily indicative of
what the actual financial position of the REIT Corporation would have been
at December 31, 1996 or what the actual results of operations of the REIT
Corporation for the year ended December 31, 1996 would have been had all of
these transactions occurred and such information does not purport to
represent the future financial position or results of operations of the
REIT Corporation. See the pro forma balance sheet and statement of income
included elsewhere in this Proxy Statement/Prospectus.
(3) Excludes special capital transaction distributions of $.24 per Unit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company derives its revenue from the leasing of the Company's
restaurant properties to operators on a "triple net" basis, which is a lease
that imposes on the tenant all obligations for real property taxes and
assessments, repairs and maintenance and insurance. To the extent the landlord
retains any of these responsibilities, the lease becomes less than "triple
net."
The Company's leases provide for a base rent plus a percentage of the
restaurant's sales in excess of a threshold amount. Total restaurant sales,
the primary determinant of the Company's revenues, are a function of the number
of restaurants in operation and their performance. Sales at individual
restaurants are influenced by local market conditions, by the efforts of
specific restaurant operators, by marketing, by new product programs, support
by the franchisor and by the general state of the economy.
Some of the leases of the Company's properties are treated as direct
financing leases, rather than operating leases, for purposes of generally
accepted accounting principles ("GAAP"); however, the leases do not grant the
lessees thereunder the right to acquire the properties at the expiration of
such leases. As a result, the lease is reflected as an asset on the Company's
balance sheet as net investment in direct financing leases, and the underlying
depreciable real property is not considered an asset of the Partnership for
GAAP purposes. Accordingly, the related depreciation is not reflected on the
Company's income statement; instead, there is a charge for amortization of the
investment in direct financing leases. For tax accounting purposes, however,
the depreciable real property is treated as being owned by the Company (and not
a direct financing lease) and the related charge for depreciation is reflected
on the Company's income statement. Primarily due to this treatment, GAAP
revenue and net income differ from gross rental receipts and net income, as
determined for tax purposes. The reconciliation between the GAAP and tax
treatment of these leases is described in Note 10 to the Company's audited
consolidated financial statements included elsewhere in the Proxy
Statement/Prospectus. Management believes that all acquisitions made by USRP
since December 31, 1996, as well as all future acquisitions and related leases,
will qualify as operating leases according to GAAP and, therefore, were not and
will not be recorded as a net investment in direct financing leases.
The following discussion should be read in conjunction with "Selected
Historical and Pro Forma Financial Information and Other Data" and all of the
financial statements and notes thereto included elsewhere in this
Prospectus/Proxy Statement.
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RESULTS OF OPERATIONS
Revenues in 1996 totaled $18,324,000 up 87 percent from the $9,780,000
recorded in 1995 and up 108 percent from the $8,793,000 recorded in 1994.
Revenues in 1995 were up 11 percent from the revenues recorded in 1994. The
increase in revenues is primarily due to the acquisition of 16 restaurant
properties throughout 1995 and 184 restaurant properties throughout 1996. No
additions were made to the portfolio in 1994. In addition, sales increased
each year as indicated below and the straight-lining of escalating rent in 1996
contributed to a 3 percent increase in total revenues. In 1995 and 1994
straight-lining of rents did not apply.
Total comparable sales in the restaurants located on the Company's real
estate were $133,556,000 in 1996, $129,100,000 in 1995, and $120,543,000 in
1994. The comparable store sales relate to the original Burger King portfolio
in which revenues are not only in the form of minimum base rents but also
percentage rents that are paid in relation to actual sales of each restaurant
property.
Taxes, general and administrative expenses totaled $2,461,000, up 73
percent from the $1,419,000 recorded in 1995 and up 115 percent from the
$1,144,000 recorded in 1994. An increase in the management fee of $585,000 and
expenses that directly correspond to the active growth of the Company were the
primary reasons for increased general and administrative expenses for the year
ended December 31, 1996 as compared to December 31, 1995. An increase in
expenses that directly corresponds to the active growth of the Company was the
primary reason for the increase in general and administrative expenses for the
year ended December 31, 1995 as compared to December 31, 1994.
Depreciation and amortization expenses totaled $3,978,000, up 158 percent
from the $1,541,000 recorded in 1995 and up 192 percent from the $1,361,000
recorded in 1994. These increases directly correlate to the property
acquisitions.
Rent expense totaled $2,080,000, up 48 percent from the $1,405,000
recorded in 1995 and up 54 percent from the $1,348,000 recorded in 1994. The
increase in rent expense directly correlates to the property acquisitions.
Twenty-seven (27) of the 200 properties purchased in 1995 and 1996 were
leasehold properties.
Interest expense, net of interest income, totaled $2,364,000, up from the
$192,000 in 1995 and up from the $(4) in 1994. The increase in interest
expense directly correlates to the additional property debt associated with the
acquisitions. No amounts were borrowed in 1994.
There was no write down of assets and intangible values relating to closed
properties during 1996 and 1995. A write down of $11,000 was made in 1994.
A restaurant property was sold for $825,000 at a gain of $590,000. The
sales price consisted of $82,500 in cash plus a $742,500 note receivable. The
note receivable is due on November 1, 1998. The gain on sale has been deferred
and is being accounted for under the cost recovery method. In addition,
equipment located at a restaurant property was sold for $50,000 and a $32,000
gain was recognized.
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Net income allocable to Unitholders in 1996 was $7,324,000 or $1.20 per
Unit, up 9 percent or $.10 per Unit from $5,119,000 or $1.10 per Unit achieved
in 1995. The 1995 results were up 6 percent or $.06 per Unit from the 1994
results. Excluding provisions for write down or dispositions of properties,
net income allocable to Unitholders was $1.20 in 1996, $1.10 in 1995 and $1.04
in 1994.
Regular cash distributions to the Unitholders for 1996 totaled $1.935 per
Unit with $.47 per Unit paid in the first quarter, $.48 per Unit paid in the
second quarter, $.485 per Unit paid in the third quarter, and $.50 in the
fourth quarter. Total cash distributions to Unitholders in 1995 and 1994 were
$1.71 and $1.61 per Unit, respectively.
CASH FLOW FROM OPERATIONS BASED UPON TAXABLE INCOME
The Company generally considers "cash flow from operations based upon
taxable income" to be an appropriate measure of performance. "Cash flow from
operations based upon taxable income" is calculated as the sum of taxable
income plus charges for depreciation and amortization. All leases are treated
as operating leases for taxable income purposes which results in a reconciling
item from "cash flow from operating activities". In addition, "cash flows from
operations based upon taxable income" does not consider changes in working
capital items; as a result, cash flow from operations based upon taxable income
should not be considered as an alternative to net income determined in
accordance with generally accepted accounting principles as an indication of
the Company's performance or as an alternative to cash flow determined in
accordance with generally accepted accounting principles as a measure of
liquidity. The Company believes that "cash flow from operations based upon
taxable income" is important because taxable income flows through to the
partners and it is the most consistent indication of cash generated by
operations and eliminates the fluctuations of working capital.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements is
rental revenues generated by the Company's properties. Cash generated by the
portfolio in excess of operating needs is used to reduce amounts outstanding
under the Company's credit agreements. Cash in excess of distributions is used
to cover payment of quarterly distributions to the Unitholders. Currently, the
Company's primary source of funding for acquisitions is its existing revolving
line of credit. The Company anticipates meeting its future long-term capital
needs through the incurrence of additional debt, the issuance of additional
equity, and a private placement of equity, along with cash generated from
internal operations.
As of March 19, 1997, the Company had approximately $48 million
outstanding under its $95 million line of credit with a syndicate of banks
(excluding $400,000 subject to letters of credit). This line of credit is
secured by the Company's real estate including its leasehold interests. The
Company may request advances under this line of credit to finance the
acquisition of restaurant properties, to repair and update restaurant
properties and for working capital. The banks will also issue standby letters
of credit for the account of the Company under this loan facility. This credit
agreement expires on December 28, 1998 and provides that borrowings thereunder
bear interest at 180 basis points over the London Interbank Offered Rate
(LIBOR).
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<PAGE>
Interest expense for 1996 and 1995 equaled $2,364,000 and $192,000,
respectively. During 1996, the Company also had a $20 million mortgage
warehouse facility from Morgan Keegan Mortgage Company, Inc., which was
secured by certain Company properties. As of March 19, 1997, the balance due
to Morgan Keegan Mortgage Company was zero and there were no available draws.
The borrowings thereunder bore interest at the rate of 300 basis points over
LIBOR. The proceeds from this facility were used to finance the acquisition
and purposed acquisition of various restaurant properties owned by the U.S.
Properties Business Trust I and II.
Pursuant to the Partnership Agreement, the Managing General Partner is
required to make available to the Company an unsecured, interest-free,
revolving line of credit in the principal amount of $500,000 to provide the
Company with necessary working capital to minimize or avoid seasonal
fluctuation in the amount of quarterly cash distributions. The Managing
General Partner is not required, however, to make financing available under
this line of credit before the Company obtains other financing, whether for
acquisitions, reinvestment, working capital or otherwise. The Managing General
Partner may make other loans to the Company. Each loan must bear interest at a
rate not to exceed the Morgan Guaranty Trust Company of New York prime rate
plus 1% or the highest lawful rate (whichever is less), and in no event may any
such loan be made on terms and conditions less favorable to the Company than it
could obtain from unaffiliated third parties or banks for the same purpose. To
management's knowledge, no loans have ever been made pursuant to these
arrangements and no loans were made or outstanding at any time during each of
the three years ended December 31, 1996.
The Company paid distributions in 1996 of $1.875 per Unit, which
represented 90% of cash flow from operations based upon taxable income. The
Company paid distributions for the first quarter of 1997 of $0.50 per Unit.
The Company has historically distributed from 75% to 95% of the estimated cash
generated from operations within the general objective of continued annual
growth in the distributions. In order to qualify as a REIT, the REIT
Corporation must make annual distributions to stockholders of at least 95% of
its REIT taxable income. Future distributions by the REIT Corporation will be
at the discretion of the REIT Board and will depend on actual results of
operations, the financial condition of the Company, capital requirements or
other factors management deems relevant. During 1996, the Company distributed
an aggregate of $11,167,000 to its partners. See "Price Range of Units and
Distribution Policy."
INFLATION
Some of the Company's leases are subject to adjustments for increases in
the Consumer Price Index, which reduces the risk to the Company of the adverse
effects of inflation. Additionally, to the extent inflation increases sales
volume, percentage rents may tend to offset the effects of inflation on the
Company. Because triple net leases also require the restaurant operators to
pay for some or all operating expenses, property taxes, property repair and
maintenance costs and insurance, some or all of the inflationary impact of
these expenses will be borne by the restaurant operators and not by the
Company.
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Operators of restaurants, in general, possess the ability to adjust menu
prices quickly. However, competitive pressures may limit a restaurant
operator's ability to raise prices in the face of inflation.
SEASONALITY
Fast food restaurant operations historically have been seasonal in nature,
reflecting higher unit sales during the second and third quarters due to warmer
weather and increased leisure travel. This seasonality can be expected to
cause fluctuations in the Company's quarterly unit revenue to the extent it
receives percentage rent.
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BUSINESS
GENERAL
The Company acquires, owns and manages income-producing properties that it
leases on a triple net basis to operators of fast food and casual dining
restaurants, primarily BURGER KING (the second largest restaurant chain in the
United States in terms of system wide sales), and other national and regional
brands including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, KFC, PIZZA HUT,
SCHLOTZSKY'S and TACO BELL. The Company acquires properties either from third
party lessors or from operators on a sale/leaseback basis. Under a triple net
lease, the tenant is obligated to pay all costs and expenses, including all
real property taxes and assessments, repairs and maintenance and insurance.
Triple net leases do not require substantial reinvestments by the property
owner, and as a result more cash from operations may be used for acquisitions
and distributions to the Company's stockholders and partners, if any.
The Company is one of the largest publicly owned entities in the United
States dedicated to acquiring, owning and managing restaurant properties. At
April 17, 1997, the Company's portfolio consisted of 367 restaurant properties
in 44 states, approximately 99% of which were leased. From the Company's
initial public offering in 1986 until March 31, 1995, the Company's portfolio
was limited to approximately 125 restaurant properties, all of which were
leased on a triple net basis to operators of Burger King restaurants. In May
1994, an investor group led by Robert J. Stetson and Fred H. Margolin acquired
the Managing General Partner. In March 1995, the Managing General Partner
proposed and the Limited Partners adopted certain amendments to the Partnership
Agreements that authorized the Company to acquire additional properties not
affiliated with BKC.
Since adoption of the amendments, the Company has acquired 245 properties
for an aggregate purchase price of approximately $144 million, which includes
the value of 557,585 Units. In addition, the Company has entered into binding
contracts to acquire the 119 Acquisition Properties for an aggregate purchase
price of approximately $72 million, which includes the value of 277,131 Units.
Upon acquisition of the Acquisition Properties, the Company's portfolio will
consist of an aggregate of 486 properties in 44 states consisting of 173 BURGER
KING restaurants, eight CHILI'S restaurants, 42 DAIRY QUEEN restaurants, 30
GRANDY'S restaurants, 31 HARDEE'S restaurants, 22 PIZZA HUT restaurants, 12
SCHLOTZSKY'S restaurants, 78 ARBY'S restaurants, 17 BRUEGGER'S BAGEL
restaurants and 73 other restaurants, most of which are regional brands.
In conjunction with the Conversion, the Operating Partnership Agreement is
being amended to provide the Company with increased flexibility to pursue other
investment opportunities that arise during the ordinary course of acquiring and
leasing restaurant properties and that compliment its existing strategy. In
particular, the amendments will permit the Company to acquire properties, build
out properties in conjunction with or lease properties directly to, (i) other
food vendors, such as convenience stores, whose revenues are not exclusively
derived from food sales, and (ii) retail outlets. In addition, the amendments
will permit the Company, from time to time, to make loans for the acquisition
of real estate secured mortgages or other
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security interests thereon instead of the acquisition of the properties.
Management believes that these amendments represent a logical extension of
the Company's existing business strategy and should offer increased growth
opportunities to the Company. See "--Investment Criteria."
INDUSTRY
The restaurant industry has grown significantly over the past 20 years as
a result of population growth, the influence of the baby boom generation, the
growth of two-income families and the growth in consumers' disposable income.
Total food service industry sales during 1995 have been estimated at
approximately $277 billion. The fast food segment, which offers value pricing
and convenience, is the largest segment in the restaurant industry with
projected 1996 sales of over $100 billion. In 1995, industry sources estimate
that fast food restaurants accounted for 71% of total restaurant traffic, 52%
of chain restaurant locations and 47% of consumers' restaurant dollars spent.
The growth of the fast food segment has exceeded that of the entire
restaurant industry for over 20 years. According to industry sources, fast food
restaurant sales have grown at a 6.9% compound annual growth rate with 1995
sales up 7.1% over 1994 levels. Fast food restaurant sales are anticipated to
have grown 6.7% in 1996 to over $100 billion.
Industry sources suggest that, in the fast food industry, operators are
increasingly moving toward leasing rather than owning their restaurants.
Currently, approximately two-thirds of fast food restaurant operators lease
their restaurant properties. Leasing enables a restaurant operator to
reallocate funds to the improvement of the restaurant, the acquisition of
additional restaurants or other uses.
Management believes, based on its industry knowledge and experience, that
the Company competes with numerous other publicly-owned entities, some of which
dedicate substantially all of their assets and efforts to acquiring, owning and
managing chain restaurant properties. The Company also competes with numerous
private firms and individuals for the acquisition of restaurant properties. In
addition, there are a number of other publicly owned entities that are
dedicated to acquiring, owning and managing triple net lease properties. The
majority of chain restaurant properties is owned by restaurant operators and
real estate investors. Management believes, based on its industry knowledge and
experience, that this fragmented market provides the Company with substantial
acquisition opportunities. Management also believes that the inability of most
small restaurant owners to obtain funds with which to compete for acquisitions
as timely and inexpensively as the Company provides the Company with a
competitive advantage when seeking to acquire a restaurant property.
In addition to the Company's large number of leases to operators of BURGER
KING restaurants, the Company also leases more than 100 restaurant properties
to operators of DAIRY QUEEN, HARDEE'S, GRANDY'S and PIZZA HUT. Based on
publicly-available information, BURGER KING is the second largest fast food
restaurant system in the world in terms of system wide sales. According to
publicly-available information, there are approximately 6,500 BURGER KING
restaurant units in the United States.
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INVESTMENT CRITERIA
Since the previously approved amendments to the Partnership Agreements,
the Company has acquired 245 restaurant properties. The Company intends to
continue acquiring properties, including closing the acquisition of the
Acquisition Properties currently under binding contracts. The Company will
target the acquisition of properties of national and regional fast food or
casual dining restaurant chains, which may include Burger King, that satisfy
some or all of the following criteria:
- The rent on such properties has produced cash flow that after
deducting management fees, interest and debt amortization, or equity
issuance, would improve USRP's existing cash flow per Unit.
- The restaurants' annual sales would be in the highest 70% of the
restaurants in that chain.
- The restaurants would have historically generated at least the
normal profit for restaurants in that chain and be projected to
continue to generate a profit even if sales decreased by 10%.
- The properties would be located where the average per capita
income was stable or increasing.
- The restaurants' franchisees would possess significant net worth
and preferably operate multiple restaurants.
- The properties would be in good repair and operating condition.
Management receives acquisition proposals from a number of sources.
Management utilizes seven independent real estate professionals who assist the
Company in examining and analyzing proposed acquisitions. These professionals
are compensated principally upon the Company's closing of an acquisition of
property. There can be no assurance that management will be able to identify
properties that satisfy all or a significant number of the above criteria or
that, if identified, the Company will be able to purchase such restaurant
properties.
The Company believes that it can generate improved operating results as a
result of the acquisition of additional properties and by making loans to
tenants for the renovation and improvement of its properties. The Company also
believes that expansion and diversification of its property portfolio to
include more balance among restaurant brands will decrease its dependence on
one chain.
Management anticipates that any loans originated by the Company, following
the adoption of the amendments to the Partnership Agreements described herein,
would be made based on the following general underwriting criteria: (i) all
loans will be used by borrowers to acquire real estate and/or construct
improvements thereon and will be secured by first liens on the real estate,
(ii) in certain circumstances, the loans will be guaranteed by the
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principals of the borrowers, and (iii) the property's expected cash flow
would be an amount equal to 140% of the annual payment required to fully
amortize the loan over 20 years. The Company has not identified any
potential borrowers at this time and no assurance can be given that any
borrowers will be identified in the future or that any such borrowers will
meet the Company's underwriting criteria. Management believes that the
increased flexibility provided by these amendments will enable Company to
take advantage of investment opportunities not currently available to the
Company.
PROPERTIES
The Company currently has 367 restaurant properties. Approximately 99.5%
of these properties are leased on a triple net basis to operators of fast food
and casual dining restaurants, primarily BURGER KING and other national and
regional brands, including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, ARBY'S,
PIZZA HUT, SCHLOTZSKY'S and BRUEGGER'S BAGELS. In addition, the Company has
entered into binding contracts to acquire an additional 119 restaurant
properties. Set forth below are summary descriptions of the restaurant
properties leased to the operators of various fast food and casual dining
restaurants.
BURGER KING. The Company currently owns 173 properties operated as BURGER
KING restaurants. These BURGER KING restaurant properties are operated by more
than 70 operators.
CHILI'S. The Company currently owns eight properties operated as CHILI'S
restaurants. These CHILI'S restaurant properties are operated by two
operators.
DAIRY QUEEN. The Company currently owns 40 properties operated as DAIRY
QUEEN restaurants. These DAIRY QUEEN restaurant properties are operated by two
operators, the largest of whom operates 37 DAIRY QUEEN restaurants. In
addition, the Company has entered into a binding contract to acquire two
properties operated as DIARY QUEEN restaurants.
GRANDY'S. The Company currently owns 30 properties operated as GRANDY'S
restaurants. These GRANDY'S restaurant properties are operated by one
operator.
HARDEE'S. The Company currently owns 26 properties operated as HARDEE'S
restaurants. These HARDEE'S restaurant properties are operated by two
operators, the larger of whom operates 24 HARDEE'S restaurants. In addition,
the Company has entered into binding contracts to acquire five properties
operated as HARDEE'S restaurants.
PIZZA HUT. The Company currently owns 20 properties operated as PIZZA HUT
restaurants. These PIZZA HUT restaurant properties are operated by one
operator. In addition, the Company has entered into binding contracts to
acquire two properties operated as PIZZA HUT restaurants.
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SCHLOTZSKY'S. The Company currently owns 12 properties operated as
Schlotzsky's restaurants. These SCHLOTZSKY'S restaurant properties are
operated by two operators.
ARBY'S. The Company currently owns two properties operated as ARBY'S
restaurants. These ARBY'S restaurant properties are operated by one operator.
In addition, the Company has entered into a binding contract to acquire 76
properties operated as ARBY'S restaurants.
BRUEGGER'S BAGEL. The Company currently owns 16 properties operated as
BRUEGGER'S BAGEL restaurants. These BRUEGGER'S BAGEL restaurant properties are
operated by four operators. In addition, the Company has entered into a
binding contract to acquire one property operated as a BRUEGGER'S BAGEL
restaurant.
OTHER PROPERTIES. The Company currently owns an additional 40 restaurant
properties, most of which are operated by franchisees of regional brand names.
In addition, the Company has entered into binding contracts to acquire an
additional 33 restaurant properties operated by franchisees of regional brand
names. From time to time, the Company may acquire restaurant properties
operated by franchisees of brand names of less established national and
regional franchisers. The Company, however, does not intend to acquire a
significant number of such properties.
The Company currently owns 367 properties. The table below sets forth the
aggregate number of properties owned in each state and the franchise
affiliation of such properties.
<TABLE>
BURGER DAIRY PIZZA BRUEGGER'S TOTAL
STATE KING CHILI'S QUEEN GRANDY'S HARDEE'S HUT SCHLOTZSKY'S ARBY'S BAGELS OTHER PROPERTIES
- ----- ---- ------- ----- -------- -------- ----- ------------ ------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama . . . . . 1 1 1 3
Arizona . . . . . 6 1 1 8
Arkansas. . . . . 13 1 14
California. . . . 16 1 17
Colorado. . . . . 3 1 4
Connecticut . . . 3 3
Delaware. . . . . 1 1
Florida . . . . . 6 7 13
Georgia . . . . . 7 23 1 31
Idaho . . . . . . 1 1
Illinois. . . . . 1 2 4 7
Indiana . . . . . 2 1 2 5
Iowa. . . . . . . 2 3 5
Kansas. . . . . . 2 2
Kentucky. . . . . 3 3
Louisiana . . . . 2 2
Maine . . . . . . 4 4
Maryland. . . . . 2 1 3
Massachusetts . . 3 3
Michigan. . . . . 4 1 5
Minnesota . . . . 1 5 7
Mississippi . . . 2 2
Missouri. . . . . 3 2 5
Montana . . . . . 1 1
Nebraska. . . . . 1 1 2
Nevada. . . . . . 1 1
New Jersey. . . . 5 5
New Mexico. . . . 1 1 1 1 4
New York. . . . . 5 4 5 4 18
North Carolina. . 9 4 3 16
Ohio. . . . . . . 9 9
Oklahoma. . . . . 3 7 1 1 12
Oregon. . . . . . 5 5
Pennsylvania. . . 13 1 14
South Carolina. . 7 2 1 10
Tennessee . . . . 3 2 1 6
Texas . . . . . . 10 2 40 22 2 3 2 16 97
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Utah. . . . . . . 1 1
Vermont . . . . . 1 1
Virginia. . . . . 1 1
Washington. . . . 7 7
West Virginia . . 2 1 3
Wisconsin . . . . 5 5
Wyoming . . . . . 1 1
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total . . . . . . 173 8 40 30 26 20 12 2 16 40 367
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Percentage. . . . 47% 2% 11% 8% 7% 6% 3% 1% 4% 11% 100%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
</TABLE>
LEASES WITH RESTAURANT OPERATORS
The Company's strategy is to acquire operating properties rather than
developing new properties, although the Company has begun to acquire newly
constructed properties. Typically, the Company acquires a property that has
been operated as a fast food or casual dining restaurant and that is subject to
a lease with a remaining term of five to 20 years and a co-terminus franchise
agreement. Management believes, based on its experience, that this strategy
reduces the Company's financial risk because the restaurant operated on such
property has a proven operating record that mitigates the risk of default or
non-renewal under the lease. The Company's current properties have remaining
lease terms ranging from one to 28 years.
Substantially all of the Company's existing leases are "triple net," which
means that the tenant is obligated to pay all costs and expenses, including all
real property taxes and assessments, repairs and maintenance and insurance. The
Company's leases provide for a base rent plus a percentage of the restaurant's
sales in excess of a threshold amount. The triple net lease structure is
designed to provide the Company with a consistent stream of income without the
obligation to reinvest in the property. For the year ended December 31, 1996,
base rental revenues and percentage rental revenues represented 67% and 33%,
respectively, of total gross rental revenues. Management intends to renew and
restructure leases to increase the percentage of total rental revenues derived
from base rental revenues and decrease the percentage of total revenues from
percentage rental revenues. In addition, to encourage the early renewal of
existing leases the Company has offered certain lessees remodeling financing.
To date, the Company has renewed 38 leases early under this program. Management
considers the grants to be prudent given the increased sales resulting at the
remodeled restaurants and the lower costs incurred because of the early lease
renewals.
The Company generally acquires properties from third party lessors or from
operators in a sale/leaseback transaction in which the operator sells the
property to the Company and enters into a long-term lease (typically 20 years).
A sale/leaseback transaction is attractive to the operator because it allows
the operator to realize the value of the real estate while retaining occupancy
for the long term. A sale/leaseback transaction may also provide specific
accounting, earnings and market value benefits to the selling operator. For
example, the lease on the property may be structured by the tenant as an
off-balance sheet operating lease, consistent with Financial Accounting
Standards Board rules, which may increase the operator's earnings, net worth
and borrowing capacity. The following table sets forth certain information
regarding lease expirations for the Company's current properties and properties
under binding contracts.
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LEASE EXPIRATION SCHEDULE
NUMBER OF LEASES NET RENTAL
YEAR EXPIRING % OF TOTAL INCOME (1) % OF TOTAL
- ---- -------- ---------- ---------- ----------
1997 . . . . . . . 2 1 $ 119 1
1998 . . . . . . . 9 2 577 2
1999 . . . . . . . 24 7 1,782 7
2000 . . . . . . . 33 9 1,968 7
2001-05. . . . . . 104 28 8,205 30
2006-10. . . . . . 28 8 1,920 7
2011-15. . . . . . 28 8 2,493 9
2016-25. . . . . . 139 37 10,065 37
---- ---- -------- ----
367 100% $ 27,129 100%
---- ---- -------- ----
---- ---- -------- ----
- ------------------------
(1) Net rental income (in thousands) equals the current annualized rentals
(including any percentage rents based upon sales in 1996), less annualized
ground rents.
OWNERSHIP OF REAL ESTATE INTERESTS
Of the 367 restaurant properties that the Company owns as of April 17,
1997, the Company owns both the land and the restaurant building in fee simple
on 259 of such properties (the "Fee Properties"), the Company owns the land and
the tenant owns the building on 31 of such properties and the Company leases
the land, the building or both from a third-party lessor on 79 of such
properties (the "Leasehold Properties").
Of the 79 Leasehold Properties, 14 are properties on which the Company
leases from a third party both the underlying land and the restaurant building
and the other improvements thereon (the "Primary Leases") and then sublease the
property to the restaurant operator. Under the terms of the remaining 65
Leasehold Properties (the "Ground Leases"), the Company leases the underlying
land from a third party and owns the restaurant building and the other
improvements constructed thereon. In any event, upon expiration or termination
of a Primary Lease or Ground Lease, the owner of the underlying land generally
will become the owner of the building and all improvements thereon. The
remaining terms of the Primary Leases and Ground Leases range from one to 21
years. With renewal options exercised, the remaining terms of the Primary
Leases and Ground Leases range from five to 35 years, with the average
remaining term being 21 years.
The terms and conditions of each Primary Lease and each Ground Lease vary
substantially. Each Primary Lease and each Ground Lease, however, have certain
provisions in common, including that: (i) the initial term is 20 years or less,
(ii) the rentals payable are stated amounts that may escalate over the terms of
the Primary Leases and Ground Leases (and/or during renewal terms), but
normally are not based upon a percentage of sales of the restaurants thereon,
and (iii) the Company is required to pay all taxes and operating, maintenance
and insurance expenses for the Leasehold Properties. In addition, under
substantially all of the leases the Company may renew the term one or more
times at its option (although the provisions governing any such renewal vary
significantly and some renewal options are at a fixed rental amount while
others are at fair rental value at the time of renewal). Several Primary Leases
and
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Ground Leases also give the owner the right to require the Company, upon the
termination or expiration thereof, to remove all improvements situated on the
property.
Although the Company, as lessee under each Primary Lease and Ground Lease,
generally has the right to assign or sublet all of its rights and interests
thereunder without obtaining the landlord's consent, the Company is not
permitted to assign or sublet any of its rights or interests under 22 Primary
Leases and Ground Leases without obtaining the landlord's consent or satisfying
certain other conditions. In addition, approximately 20% of the Primary Leases
and Ground Leases require the Company to use such Leasehold Properties only for
the purpose of operating a Burger King restaurant or another type of restaurant
thereon. In any event, no transfer will release the Company from any of its
obligations under any Primary Lease or Ground Lease, including the obligation
to pay rent.
The Company leases or subleases 158 of its 367 existing restaurant
properties to a BKC franchisee under a lease/sublease, pursuant to which the
franchisee is required to operate a BURGER KING restaurant thereon in
accordance with the lessee's franchise agreement and to make no other use
thereof. Upon its acquisition of such properties, the Company assumed the
rights and obligations of BKC under the leases/subleases.
Although the provisions of BKC's standard form of lease to franchisees
have changed over time, the material provisions of the leases/subleases
generally are substantially similar to BKC's current standard form of lease
(except to the extent that BKC has granted rent reductions or deferrals or made
other lease modifications to alleviate or lessen the impact of business or
other economic problems that a franchisee may have encountered). The
leases/subleases generally provide for a term of 20 years from the date of the
opening of the restaurant and do not grant the lessee any renewal or purchase
options. The Company, however, is required under the Partnership Agreements to
renew a lease/sublease if BKC renews or extends the lessee's franchisee
agreement. The Company believes that BKC's policy generally is to renew a
franchise agreement if BKC determines that economic and other factors justify
renewal or extension and the franchisee has complied with all obligations under
the franchise agreement. The remaining terms of all the leases/subleases
currently range from one to 28 years, with the average remaining term being
nine years.
USE AND OTHER RESTRICTIONS ON THE OPERATION AND TRANSFER OF BURGER KING
RESTAURANT PROPERTIES
The Company was originally formed for the purpose of acquiring all of
BKC's interests in the original portfolio and leasing or subleasing them to BKC
franchisees under the leases/subleases. Accordingly, the Partnership Agreements
contain provisions that state, except as expressly permitted by BKC, that the
Company may not use such properties for any purpose other than to operate a
BURGER KING restaurant. In furtherance thereof, the Partnership Agreements:
(i) require the Company, in certain specified circumstances, to renew or extend
a lease/sublease and enter into a new lease with another franchisee of BKC, to
approve an assignment of a lease/sublease, to permit BKC to assume a
lease/sublease at any time and to renew a Primary Lease, and (ii) impose
certain restrictions and limitations upon the Company's ability to sell, lease
or otherwise transfer any interest in such properties. The Partnership
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Agreements require the Company to provide BKC notice of default under a
lease/sublease and an opportunity to cure such default prior to taking any
remedial action. The Partnership Agreements also require the Company under
certain circumstances to provide tenants with assistance with remodeling costs.
Such terms with respect to such properties imposed on the Company by the
Partnership Agreements may be less favorable than those imposed upon other
lessors of BURGER KING restaurants. BKC has advised the Company that it intends
to waive or not impose certain of the restrictive provisions contained in the
Partnership Agreements and the Company is discussing BKC's position with BKC to
clarify such provisions.
RESTAURANT ALTERATIONS AND RECONSTRUCTION
The Company believes that improving, expanding, rebuilding or replacing
its restaurant properties from time to time is important. In addition to
normal maintenance and repair requirements, each franchisee is required under
BKC's franchise agreement and lease/sublease, at its own cost and expense, to
make such alterations to a BURGER KING restaurant as may be reasonably required
by BKC from time to time to modify the appearance of the restaurant to reflect
the then current image requirements for Burger King restaurants. Most of the
properties that are operating as BURGER KING restaurants are 15 to 20 years
old. The Company believes that many of these properties require substantial
improvements to maximize sales and that their condition is below BKC's current
image requirements.
To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the
end of the lease term and enhance the value of the underlying property to the
Company. As a result of this program, the Company has extended the lease term
for 38 leases/subleases.
COMPETITION
The restaurants operated on the properties are subject to significant
competition, including competition from other national and regional fast food
restaurant chains, including other BURGER KING restaurants, local restaurants,
national and regional restaurant chains that do not specialize in fast food but
appeal to many of the same customers and other competitors such as convenience
stores and supermarkets that sell prepared and ready-to-eat foods. The success
of the Company depends, in part, on the ability of the restaurants operated on
the properties to compete successfully with such businesses. The Company does
not anticipate that it will seek to engage directly in or meet such
competition. Instead, the Company will depend upon the experience and ability
of the lessees operating the restaurants located on the properties and the
particular franchise system generally to compete with these other restaurants
and similar operations. The Company believes that the ability of its lessees to
compete is affected by their compliance with the image requirements at their
restaurants.
Management believes, based on its industry knowledge and experience, that
the Company will compete with numerous other publicly-owned entities, some of
which dedicate substantially
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all of their assets and efforts to acquiring and managing properties operated
as fast food or casual dining restaurants. In addition, the Company will
compete with numerous private firms and individuals for the acquisition of
restaurant properties. Such investors may have greater financial resources
than the Company.
REGULATION
The Company, through its ownership of interests in and management of real
estate, is subject to various environmental, health, land-use and other
regulation by federal, state and local governments that affects the development
and regulation of restaurant properties. The Company's leases impose the
primary obligation for regulatory compliance on the operators of the restaurant
properties.
ENVIRONMENTAL REGULATION
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of
removal or remediation of certain hazardous substances released on or within
its property. Such liability may be imposed without regard to whether the owner
or operator knew of, or caused the release of, the hazardous substances. In
addition to liability for cleanup costs, the presence of hazardous substances
on a property could result in the owner or operator incurring liability as a
result of a claim by an employee or another person for personal injury or a
claim by an adjacent property owner for property damage.
In connection with the Company's acquisition of a new property, a Phase I
environmental assessment is obtained. A Phase I environmental assessment
involves researching historical usages of a property, databases containing
registered underground storage tanks, and other matters, including an on-site
inspection to determine whether an environmental issue exists with respect to
the property. If the results of a Phase I environmental assessment reveal
potential issues, a Phase II assessment, which may include soil testing, ground
water monitoring, or borings to locate underground storage tanks, is ordered
for further evaluation. Depending upon the results of such assessment, the
transaction is either consummated or terminated.
The Company is not currently a party to any litigation or administrative
proceeding with respect to any property's compliance with environmental
standards. Furthermore, the Company is unaware of, and does not anticipate, any
such action, or the need to expend any of its funds in the foreseeable future
in connection with its operations or ownership of existing properties that
would have a material adverse effect upon the Company. See "Risk Factors--Real
Estate Investment Risks."
AMERICANS WITH DISABILITIES ACT
Under the ADA, all public accommodations, including restaurants, are
required to meet certain federal requirements relating to physical access and
use by disabled persons. A determination that the Company or a property of the
Company is not in compliance with the ADA could result in the imposition of
fines, injunctive relief, damages, or attorney's fees. The
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Company's leases contemplate that compliance with the ADA is the
responsibility of the operator. The Company is not currently a party to any
litigation or administrative proceeding with respect to a claim of violation
of the ADA and does not anticipate any such action or proceeding that would
have a material adverse effect upon the Company.
LAND-USE AND SAFETY REGULATIONS
The Company and its restaurant operators are required to operate the
properties in compliance with various laws, land-use regulations, fire and
safety regulations, and building codes as may be applicable or later adopted by
the governmental body or agency having jurisdiction over the property or the
matter being regulated. The Company does not believe that the cost of
compliance with such regulations and laws will have a material adverse effect
upon the Company.
HEALTH REGULATIONS
The restaurant industry is regulated by a variety of state and local
departments and agencies concerned with the health and safety of restaurant
customers. These regulations vary by restaurant location and type (I.E., fast
food or casual dining). The Company's leases provide for compliance by the
restaurant operator with all health regulations and inspections and require the
restaurant operator to obtain insurance to cover liability for violation of
such regulations or the interruption of business due to closure caused by
failure to comply. The Company is not currently a party to any litigation or
administrative proceeding concerning compliance with health regulations and
does not anticipate any such action or proceeding that would have a material
adverse effect upon the Company.
INSURANCE
The Company requires its lessees to maintain adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies with commercially reasonable and customary deductibles. The Company
also requires that it be named as an additional insured under such policies.
Certain types and amounts of insurance are required to be carried by each
restaurant operator under the leases with the Company, and the Company actively
monitors tenant compliance with this requirement. The Company intends to
require lessees of subsequently acquired properties to obtain similar insurance
coverage. There are, however, certain types of losses generally of a
catastrophic nature, such as earthquakes and floods, that may be either
uninsurable or not economically insurable, as to which the Company's properties
are at risk depending on whether such events occur with any frequency in such
areas. An uninsured loss could result in a loss to the Company of both its
capital investment and anticipated profits from the affected property. In
addition, because of coverage limits and deductibles, insurance coverage in the
event of a substantial loss may not be sufficient to pay the full current
market value or current replacement cost of the Company's investment.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make using insurance proceeds to
replace a facility after it has been damaged or destroyed infeasible. Under
such circumstances, the insurance proceeds received by the Company might be
inadequate to restore its economic position with respect to such property.
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EMPLOYEES
As of April 18, 1997, the Company employed 15 individuals on either a full
or part-time basis. In addition, the Company retains, on an independent
contract basis, other parties in connection with the operation of the Company
and its properties, including auditing, legal, property origination and other
services.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation, nor to
its knowledge is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the REIT Corporation's policies with
respect to investments, financings, affiliate transactions and certain other
activities. Such policies are a continuation of the policies currently being
employed by USRP. The REIT Corporation's policies with respect to these
activities have been established by management and may be amended or revised
from time to time at the discretion of the REIT Board without a vote of the
stockholders of the REIT Corporation. No assurance can be given that the
Company's investment objectives will be attained or that the value of the
Company will not decrease. As the sole general partner of the Operating
Partnership, the REIT Corporation will also determine the investment policies
of the Operating Partnership.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE
The Company's primary business objective is to maximize stockholder value
by maintaining long-term growth in cash available for distribution to its
stockholders. The Company intends to pursue this objective by continuing to
acquire triple net leased properties and structuring sale/leaseback
transactions consistent with its strategies prior to the Conversion. The
Company's policy is to acquire or develop assets where the Company believes
that opportunities exist for acceptable investment returns. See "The Company--
Strategy."
The Company expects to pursue its investment objectives primarily through
the direct ownership of properties. The Company intends to invest in or
develop restaurant properties. As part of its strategy of expanding its
restaurant property portfolio, the Company intends to build-out properties in
conjunction with other food vendors, such as convenience stores, and retail
outlets. All of the Company's properties will be managed directly by the
Company.
The Company may also participate with other entities in property
ownership, through joint ventures or other types of common ownership. Equity
investments may be subject to existing
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mortgage financing and other indebtedness which have priority over the equity
interests of the Company.
INVESTMENTS IN REAL ESTATE MORTGAGES
While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages or other real estate interests
consistent with its qualification as a REIT. The Company may also invest in
participating or convertible mortgages if the REIT Board concludes that the
Company and its stockholders may benefit from the cash flow or any appreciation
in the value of the subject property. Such mortgages are similar to equity
participations. The mortgages in which the Company may invest may be either
first mortgages or junior mortgages and may or may not be insured by a
governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, the Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities, although it
does not intend to do so. See "--Certain Other Policies" and "Federal Income
Tax Considerations--The Merger Alternative--Taxation of the REIT Corporation as
a REIT."
PERIODIC REVIEW OF ASSETS
The Company has no current intention to dispose of any of its Properties.
Nevertheless, the Company reserves the right to dispose of any of its
Properties or any property that may be acquired in the future if the Company
determines that the disposition of such property is in the best interests of
the Company and its stockholders.
FINANCING POLICIES
As a general policy, the Company intends to maintain a ratio of total
indebtedness of 50% or less to the greater of total market capitalization
(I.E., the market value of issued and outstanding shares of capital stock plus
total consolidated debt) or the original cost of all of the Company's
properties as of the date of such calculation. However, no assurance can be
given that the Company will be able to accomplish this objective. The debt
ratio may be based from time to time upon the stock market value of equity, and
accordingly may fluctuate with changes in the price of the shares.
On a pro forma basis at March 31, 1997, the Company had a ratio of
debt-to-total market capitalization of 32%. See "Capitalization." Assuming no
change in market value of issued and outstanding shares of Common Stock, the
Company would be able to incur approximately $100 million of additional
indebtedness and still maintain a ratio of debt-to-total market capitalization
of less than 100%. The Company, however, may from time to time reevaluate its
debt policy in light of current economic conditions, relative costs of debt and
equity capital, changes in the market capitalization of the Company,
acquisition opportunities and other
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factors, and may modify its debt financing policy and may increase or
decrease its debt ratio without a vote of its stockholders. Neither the
Articles nor the REIT Corporation's Bylaws contain any limitations on the
amount or percentage of indebtedness the Company may incur.
Indebtedness incurred by the Company may be in the form of bank
borrowings, purchase money obligations to the sellers of properties, publicly
or privately placed debt instruments or financing from institutional investors
or other lenders, any of which indebtedness may be unsecured or may be secured
by mortgages or other interests in properties owned by the Company. The
recourse of the holders of such indebtedness may be to all or any part of the
properties of the Company or may be limited to the particular property to which
the indebtedness relates. Subject to any contractual restrictions, the
proceeds from any borrowings by the Company may be used for the payment of
dividends, for working capital, to refinance existing indebtedness or to
finance acquisitions of new properties.
As another policy, the Company intends to generally not incur
variable-rate mortgage debt other than the indebtedness outstanding under its
existing credit facility. While the organizational documents of the Company do
not contain any prohibition against the use of variable rate mortgage loans,
the Company believes that it is a more prudent and conservative financing
strategy to utilize only fixed rate mortgage loans for all long-term
indebtedness.
In the event that the REIT Board determines to raise additional equity
capital, the REIT Board has the authority, without stockholder approval, to
issue additional shares of Common Stock or shares of preferred stock in any
manner (and on such terms and for such consideration) it deems appropriate,
including in exchange for property, subject to the Maryland General Corporation
Law (the "MGCL"). Existing stockholders would have no preemptive right to
purchase such shares in any offering, and any such offering might cause a
dilution of a stockholder's investment in the Company. See "Description of
Capital Stock."
If the REIT Board determines to raise additional equity capital to fund
investments by the Operating Partnership, the Company will contribute such
funds to the Operating Partnership as a contribution to capital and purchase of
additional partnership interests. The Company may issue additional shares of
Common Stock in connection with the acquisition of interests in the Operating
Partnership that have been tendered to the Operating Partnership for
redemption.
The REIT Board also has the authority to cause the Operating Partnership
to issue additional partnership interests in any manner (and on such terms and
for such consideration) as it deems appropriate, including in exchange for
property. Any such partnership interests will be redeemable at the option of
the holder, which redemption the Company intends to cause to be made in Common
Stock pursuant to the redemption rights.
AFFILIATE TRANSACTION POLICY
The Company has adopted a policy that it will not (i) acquire from or sell
to any director, officer or employee of the Company, or any entity in which a
director, officer or employee of the Company beneficially owns more than a 1%
interest, or, except for any property in which the Company owns an economic
interest, acquire from or sell to any affiliate of any of the
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foregoing, any property or other assets of the Company, (ii) make any loan to
or borrow from any of the foregoing persons, or (iii) without the approval of
a majority of the independent directors, engage in any other transaction with
any of the foregoing persons. Currently, the Master Partnership Agreement
does not restrict the ability of the Managing General Partner or its
principals from owning and/or operating restaurants on Company properties or
elsewhere.
CERTAIN OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuer, (ii) underwrite securities of other
issuers, or (iii) actively trade in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise reacquire shares of Common Stock or any of its other
securities in the open market or otherwise and may engage in such activities in
the future. The REIT Board has no present intention of causing the Company to
repurchase any shares of Common Stock, other than pursuant to any dividend
reinvestment plan, and any such action would be taken only in conformity with
applicable Federal and state laws and the requirements for qualifying as a REIT
under the Code.
The Company has previously made loans to third parties, and it may in the
future continue to make loans to third parties, including, without limitation,
loans to joint ventures in which it participates. The Company has not engaged
in trading, underwriting or agency distribution or sale of securities of other
issuers, and the Company does not intend to do so in the future. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the REIT Board without the vote of the stockholders.
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY
The Units are listed for trading on the NYSE under the ticker symbol
"USV." As of April 25, 1997, there were 7,453,250 Units outstanding and the
record number of Unitholders was 1,785. Set forth below are the high and low
sale prices for the Units as reported by the NYSE for the indicated periods and
the cash dividends declared in such periods (and paid in the subsequent
period).
<TABLE>
1994 HIGH LOW DISTRIBUTION
---- ---- --- ------------
<C> <C> <C> <C>
1st quarter $16 3/4 $15 7/8 $ .39
2nd quarter 17 1/4 15 3/8 .39
3rd quarter 17 1/2 16 3/4 .41
4th quarter 17 3/8 13 .42
-----
$1.61
-----
-----
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1995 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $16 1/2 $14 1/4 $ .42
2nd quarter 17 1/8 15 3/4 .42
3rd quarter 18 7/8 16 3/4 .43
4th quarter 20 1/4 18 .44
-----
$1.71
-----
-----
1996 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $23 3/8 $19 1/2 $ .47
2nd quarter 25 21 1/8 .48
3rd quarter 25 3/8 21 1/2 .485
4th quarter 28 1/4 22 5/8 .50
------
$1.935
------
------
1997 HIGH LOW DISTRIBUTION
---- ---- --- ------------
1st quarter $30 3/8 $27 $ .50
2nd quarter (through April 25, 1997) $28 1/2 $26 1/2 $ -
</TABLE>
In July 1995, USRP announced its intention to repurchase up to 300,000
units. At that time, management believed that the repurchase of the Units
represented a good investment value for USRP and the Unitholders. Through
December 31, 1996, USRP had purchased 30,000 Units. No further purchases have
been made or are currently contemplated because management currently believes
that a better investment value for the Company and the Unitholders is the
acquisition of additional restaurant properties.
The Company intends to maximize the cash available for distributions and
enhance stockholder value by acquiring or developing additional restaurant
properties that meet its investment criteria. See "The Company--Strategy."
In connection therewith, the Company intends to make regularly quarterly
distributions to its stockholders. Currently, on an annualized basis, the
distributions made by the Company to its Unitholders is $2.00 per Unit. The
Company has historically distributed from 75% to 95% of its estimated cash
available for distribution. In order to qualify to be taxed as a REIT, the
REIT Corporation must make annual distributions to stockholders of at least 95%
of its REIT taxable income (determined by excluding any net capital gain).
Under certain circumstances, the REIT Corporation may be required to make
distributions in excess of cash available for distribution in order to meet
such distribution requirements. In such a case, the REIT Corporation may find
it necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of preferred stock or additional Common Stock.
Future distributions by the REIT Corporation will be at the discretion of
the REIT Board and will depend on the actual results of operation of the REIT
Corporation, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions
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of the Code and such other factors as the REIT Board deems relevant.
Subject to these restrictions, the REIT Board intends to continue the
distribution policy of USRP.
The Company may in the future implement a dividend reinvestment program
under which the stockholders may elect automatically to reinvest distributions
in shares of Common Stock. The Company may from time to time repurchase shares
of Common Stock in the open market for the purpose of fulfilling its
obligations under the program, if adopted, or may elect to issue additional
shares of Common Stock.
USE OF PROCEEDS
The REIT Corporation will not receive any cash proceeds from the issuance
of the Common Stock offered hereby. In consideration for issuing the Common
Stock, as contemplated in this Proxy Statement/Prospectus, the REIT Corporation
will receive in exchange Units in like amounts.
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CAPITALIZATION
The following table sets forth the capitalization of USRP as of December
31, 1996, and as adjusted to reflect as of December 31, 1996 (i) the purchase
of 45 properties for $27,715,000 completed since December 31, 1996, including
the value of 118,582 Units of $3,320,000, (ii) the purchase of 16 properties
from QSR Income Properties, Ltd. ("QSR") for 277,131 Units (at $28.50 per
Unit), (iii) the purchase of 103 properties from other sellers that as of April
17, 1997 are under binding contracts for $64,148,000, including the value of
210,526 Units valued at $6,000,000, (iv) the additional borrowings of
$82,372,000 required to purchase the properties acquired and under contract,
(v) the sale of four properties for $2,892,000, (vi) the Managing General
Partner's conversion of the Operating Partnership General Partner Interest or
the assignment thereof to USRP (depending upon how the Conversion is effected)
and converting the USRP Interest for 850,000 Initial Shares, with the Initial
Shares valued at the current market price of a Unit (assumed $28.50 per share),
and the related cost of the Conversion aggregating $580,000 as if such
transactions had occurred on such date, and (vii) consolidation with the REIT
Corporation. The information presented below should be read in conjunction
with the Pro Forma Balance Sheet of the Company (and the accompanying note
disclosures thereto) included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
COMPANY ON A PRO
FORMA BASIS
USRP ACTUAL AS ADJUSTED
----------- ----------------
Unaudited
(IN THOUSANDS, EXCEPT
UNIT AND SHARE DATA)
<S> <C> <C>
Line of credit and long term debt $ 69,486 $151,858
Obligations under capitalized lease 362 362
-------- --------
69,848 152,220
Equity of General Partners and Unitholders:
Interest of Managing General Partner 1,163
Interest of Unitholders:
6,894,003 Units issued and outstanding 103,120
Shares of capital stock, par value $.001 per share; authorized;
10,000,000 shares of Preferred Stock, 45,000,000 shares
of Common Stock, and 5,000,000 shares of Excess
Stock; issued and outstanding: 8,352,000 shares
of Common Stock on a pro forma basis(c) 9 (a)
Additional paid in capital 146,098 (a)
Accumulated deficit - (23,611)(b)
104,283 122,496
-------- --------
Total Capitalization $174,131 $274,716
Capitalization allocable to unitholders $170,683 N/A
Book Value per Unit/Share $ 24.76 $ 32.89
-------- --------
-------- --------
</TABLE>
- --------------------
(a) Reflects conversion of the Managing General Partner's and limited
partners' units into shares of common stock of the REIT.
(b) Reflects the costs and fees as follows:
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Cost of Conversion $ 580
Cost of property management contract 23,031
-------
$23,611
-------
-------
(c) Excludes 350,000 Units/Shares issuable upon exercise of options held by
the Managing General Partner.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company is currently managed by the Managing General Partner. Upon
consummation of the Conversion, the Company will be managed by members of the
REIT Board initially comprised of the current directors of the Managing General
Partner. It is anticipated that the REIT Board will be expanded in 1997 to
include additional independent directors. The REIT Board is divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring in each year. The directors will be responsible for electing
the Company's executive officers, who will serve at the discretion of the REIT
Board. Robert J. Stetson, President and Chief Executive Officer of the
Managing General Partner, will serve as the REIT Corporation's President and
Chief Executive Officer and Fred H. Margolin, Chairman of the Board, Secretary
and Treasurer of the Managing General Partner, will serve as Chairman of the
REIT Board. The persons who will be directors, executive officers of the REIT
Corporation following consummation of the Conversion and the Termination are as
follows:
POSITION(S) AND
NAME AGE OFFICES HELD
---- --- ---------------
Robert J. Stetson 46 Chief Executive Officer,
President and Director
Fred H. Margolin 47 Chairman of the Board,
Secretary, Treasurer
Gerald H. Graham 59 Director
David K. Rolph 48 Director
Darrel L. Rolph 59 Director
Eugene G. Taper 59 Director
ROBERT J. STETSON. Mr. Stetson is the President, Chief Executive Officer
and a director of the REIT Corporation. Since 1978, Mr. Stetson has been
primarily engaged in restaurant chain management, including the acquisition and
management of restaurant properties. Prior to 1987, Mr. Stetson served in
several positions with PepsiCo Inc. and its subsidiaries, including Chief
Financial Officer of Pizza Hut. From 1987 until 1992, Mr. Stetson served as a
senior executive in restaurant and retailing subsidiaries of Grand Metropolitan
PLC, the ultimate parent
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corporation of Burger King. During this period, Mr. Stetson served as the
Chief Financial Officer and later President-Retail Division of Burger King
and Chief Financial Officer and later Chief Executive Officer of Pearle
Vision. As Chief Financial Officer of Burger King, Mr. Stetson was
responsible for managing more than 750 restaurants that Burger King leased to
tenants. Mr. Stetson is also a director of Bayport Restaurant Group, a
publicly-traded restaurant company. Mr. Stetson received a Bachelor of Arts
degree from Harvard College and an M.B.A. from Harvard Business School. Mr.
Stetson is 46 years old.
FRED H. MARGOLIN. Mr. Margolin is the Chairman of the Board, Secretary,
Treasurer and a director of the REIT Corporation. In 1977, Mr. Margolin
founded Intercon General Agency, a national insurance agency specializing in
the development and marketing of insurance products for financial institutions.
Mr. Margolin served as the Chief Executive Officer of Intercon General Agency
from its inception until its sale to a public company in 1982. In 1989, Mr.
Margolin founded and became the President of American Eagle Premium Finance
Company, one of the largest independent premium finance companies in Texas.
From 1982 through 1988, Mr. Margolin developed and then leased or sold shopping
centers having an aggregate cost of approximately $50,000,000. Mr. Margolin
received a Bachelor of Science degree from the Wharton School of the University
of Pennsylvania and an M.B.A. from Harvard Business School. Mr. Margolin is 47
years old.
GERALD H. GRAHAM. Mr. Graham is a director of the REIT Corporation. Mr.
Graham is a professor and the Dean of the Barton School of Business at Wichita
State University. Mr. Graham is 59 years old.
DAVID K. ROLPH. Mr. Rolph is a director of the REIT Corporation. Mr.
Rolph is the President of the Tex-Mex restaurant chain, "Carlos O'Kellys" and
the Vice President of Sasnak Management Corp., a restaurant management company,
positions he has held for the past five years. Mr. Rolph is 48 years old.
DARREL L. ROLPH. Mr. Rolph is a director of the REIT Corporation. Mr.
Rolph is the Secretary of "Carlos O'Kellys" and the President of the Sasnak
Management Corp., a restaurant management company, positions he has held for
the past five years. Mr. Rolph is 59 years old.
EUGENE G. TAPER. Mr. Taper is a director of the REIT Corporation. Mr.
Taper is a certified public accountant and a business consultant, since 1993.
Prior to 1993, Mr. Taper was a partner of Deloitte & Touche LLP, an
international public accounting firm. Mr. Taper is 59 years old.
EXECUTIVE COMPENSATION
The REIT Corporation was incorporated in January 1997. Accordingly, the
REIT Corporation did not pay any cash compensation to its executive officers
for the year ended December 31, 1996. The following table sets forth the
estimated annualized base salary expected to be paid to each of the REIT
Corporation's executive officers for the 1997 fiscal year.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(1)
------------------ -------- -------- ---------------
Robert J. Stetson
President and Chief Executive
Officer $250,000 - -
Fred H. Margolin
Chairman of the Board of
Directors and Secretary $250,000 - -
- ----------------------
(1) Any bonuses or other annual compensation paid to the REIT Corporation's
executive officers will be at the discretion of the REIT Board and will be
payable following the conclusion of the fiscal year.
EMPLOYMENT AGREEMENTS
Each of Messrs. Stetson and Margolin will enter into an employment
agreement (the "Employment Agreements") with the REIT Corporation on the date
of the Termination. Each of the Employment Agreements will expire on the third
anniversary of the date thereof. Pursuant to the Employment Agreements, Mr.
Stetson will serve as President and Chief Executive Officer of the REIT
Corporation and will be paid an annual base salary of $250,000 and Mr. Margolin
will serve as Chairman of the Board, Secretary and Treasurer of the REIT
Corporation and will be paid an annual base salary of $250,000. The Employment
Agreements provide for salary raises at the discretion of the REIT Board,
provided that, prior to December 31, 2000, neither Mr. Stetson nor Mr. Margolin
will receive cash compensation (I.E., excluding the value of any equity-based
compensation, such as stock options or shares of restricted stock) in excess of
$300,000.
Under the terms of the respective Employment Agreements, if the covered
executive's employment with the REIT Corporation is terminated by the REIT
Corporation other than for "cause" (as defined in the Employment Agreement) or
by "constructive discharge" (as defined in the Employment Agreement), the
terminated executive will be entitled to receive an amount equal to two times
the highest annualized rate of salary prior to the date of termination. The
Employment Agreements also provide that the covered executive may terminate his
employment for any reason upon six months' prior written notice. In the event
of such a termination, the REIT Corporation will be obligated to pay the
executive the compensation due him up to the effective date of termination.
The Employment Agreements also provide for the payment of severance
compensation in an amount equal to 2.99 times the covered executive's
compensation which includes both salary and any cash bonus). In the event such
covered executive's employment is terminated without cause or by constructive
discharge within three years following a "change in control" (as defined in the
Employment Agreement).
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INDEMNIFICATION AGREEMENTS
The REIT Corporation will enter into indemnification agreements requiring
the REIT Corporation to indemnify its officers and directors, and advance
expenses, to the maximum extent permitted by Maryland law. See "Certain
Provisions of Maryland Law and of the REIT Corporation's Articles and Bylaws--
Limitation of Liability and Indemnification."
INSURANCE
The REIT Corporation will have directors' and officers' liability
insurance in the aggregate amount of $____ million. Directors' and officers'
liability insurance generally insures (i) the directors and officers of the
REIT Corporation from any claim arising out of an alleged wrongful act by the
directors and officers in their respective capacities as directors and officers
and (ii) the REIT Corporation to the extent that it has indemnified a director
or officer for such loss.
CERTAIN TRANSACTIONS WITH RELATED PARTIES
In connection with the Termination, the Managing General Partner will
withdraw as the managing general partner of the Partnerships and convert the
Operating Partnership General Partner Interest or assign such interest to USRP
(depending upon the Conversion is effected) and convert the USRP Interest for
the Acquisition Shares. See "The Conversion--Termination of Property
Management Contract and Partnership Interests."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock by (i) each person who is
expected to be a stockholder of the REIT Corporation holding more than 5% of
the outstanding shares of Common Stock, (ii) each director and each executive
officer and (iii) all directors and executive officers of the REIT Corporation
as a group. Except as otherwise indicated, each person named in the table has
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such person after completion of the Conversion
and the Termination, assuming the Conversion is effected through the Merger.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF ALL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED SHARES
------------------- ------------------ -----------------
Robert J. Stetson 484,137(2) 6.6%
Fred H. Margolin 498,102(2) 6.8%
David K. Rolph 507,637(2) 6.9%
Darrel L. Rolph 469,637(2) 6.4%
Eugene G. Taper 540 *
QSV Properties, Inc. 469,637(3) 6.4%
All directors and
executive officers
as a group (6 persons) 551,142(2) 7.5
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- --------------
* Less than 1%.
(1) The address of each of these persons and entities is 5310 Harvest Hill
Road, Suite 270, Dallas, Texas 75230.
(2) Includes 469,637 shares beneficially owned by QSV Properties, Inc., of
which Messrs. Stetson, Margolin, David Rolph and Darrel Rolph are the
stockholders and directors.
(3) Includes 69,637 shares to be issued as part of the Acquisition Price and
350,000 shares issuable upon the exercise of an option which is
immediately exercisable.
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SECURITIES
The summary of the terms of the REIT Corporation's capital stock set forth
below does not purport to be complete and is subject to, and qualified in its
entirety by, reference to the Articles and the REIT Corporation's Bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this Proxy Statement/Prospectus constitutes a part. See "Available
Information."
GENERAL
The Articles authorize the REIT Corporation to issue up to 45 million
shares of Common Stock, par value $.001 per share, 10 million shares of
Preferred Stock, par value $.001 per share, and five million shares of excess
stock, par value $.001 per share (the "Excess Stock"). Upon completion of the
Conversion, assuming the Merger Alternative is used, ___________ shares of
Common Stock will be issued and outstanding. Under the MGCL, stockholders
generally are not liable for the corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of the Preferred
Stock and any other shares or series of stock hereinafter designated by the
REIT Board, holders of shares of Common Stock will be entitled to receive
dividends on the stock if, as and when authorized and declared by the board of
directors of the REIT Corporation out of assets legally available therefor and
to share ratably in the assets of the REIT Corporation legally available for
distribution to its stockholders in the event of its liquidation, dissolution
or winding-up after payment of, or adequate provision for payment of, all known
debts and liabilities of the REIT Corporation. The REIT Corporation intends to
pay regular quarterly dividends.
Each outstanding share of Common Stock entitles the holder thereof to one
vote on all matters submitted to a vote of stockholders, including the election
of directors and, except as otherwise required by law or except as provided
with respect to any other class or series of stock, the holders of shares of
Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means that the holders of a majority
of the outstanding shares of Common Stock can elect all of the directors then
standing for election and
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the holders of the remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no conversion, sinking fund,
redemption rights or preemptive rights to subscribe for any securities of the
REIT Corporation.
Shares of Common Stock will have equal dividend, distribution, liquidation
and other rights and will have no preference or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions unless approved by the holders of at
least two-thirds of the shares of stock entitled to vote on the matter unless a
lesser percentage (but not less than a majority of all of the votes to be cast
on the matter) is set forth in the corporation's charter. The Articles provide
for the vote of the holders of a majority of the shares of stock outstanding
and entitled to vote on the matter to approve any of such actions, except for
amendments to the Articles relating to the number of directors and the
classification of the board of directors of the REIT Corporation which require
approval of holders of at least two-thirds of the shares of stock entitled to
vote on the matter.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the REIT Board. Prior to issuance of shares of each
series, the REIT Board is required by the MGCL and the Articles to fix for each
such series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as are permitted by the
MGCL. The REIT Board could authorize the issuance of shares of Preferred Stock
with terms and conditions which could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority of,
shares of Common Stock might receive a premium for their shares of Common Stock
over the then-prevailing market price of those shares of Common Stock. No
shares of Preferred Stock are outstanding and the REIT Corporation has no
present plans to issue any Preferred Stock.
RESTRICTIONS ON TRANSFER
For the REIT Corporation to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of the issued and
outstanding shares of capital stock of the REIT Corporation may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year, and the REIT
Corporation must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year.
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Because the REIT Board believes it is essential for the REIT Corporation
to continue to qualify as a REIT, the Articles, subject to certain exceptions
described below, provide that no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than (i) 8.75% of the number of
outstanding shares of Common Stock, except for QSV which may own initially no
more than 15.0% of the number of such outstanding shares, or (ii) 9.8% of the
number of outstanding shares of Preferred Stock of any series of Preferred
Stock (together, the "Ownership Limitation"). The Ownership Limitation with
respect to the shares of Common Stock will be increased, to a maximum of 9.8%,
and the ownership limit applicable to QSV will be decreased, subject to a
minimum percentage equal to the Ownership Limitation in proportion to any
reduction in QSV's direct or indirect percentage ownership of the REIT
Corporation as a result of additional issuances or dispositions of securities
of the REIT Corporation.
Any transfer of Common Stock or Preferred Stock that would (a) result in
any person (other than QSV with respect to shares of Common Stock) owning,
directly or indirectly, Common Stock or Preferred Stock in excess of the
Ownership Limitation, (b) result in QSV owning, directly or indirectly, in
excess of 15.0% of the number of outstanding shares of Common Stock (or the
decreased percentage that may be applicable), (c) result in the Common Stock
and Preferred Stock being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iv) result in the REIT Corporation
being "closely held" within the meaning of Section 856(h) of the Code, or (v)
cause the REIT Corporation to own, directly or constructively, 10% or more of
the ownership interests in a tenant of the REIT Corporation's or the Operating
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, shall be null and void, and the intended transferee will acquire no
rights in such shares of Common Stock or Preferred Stock. Such Common Stock or
Preferred Stock will be designated as "Excess Stock" and transferred
automatically to a trust (the "Trust") effective on the day before the
purported transfer of such Common Stock or Preferred Stock. The record holder
of the shares of Common Stock or Preferred Stock that are designated as Excess
Stock (the "Prohibited Owner") will be required to submit such number of shares
of Common Stock or Preferred Stock to the REIT Corporation for registration in
the name of the Trust. The Trustee of the Trust will be designated by the REIT
Corporation, but will not be affiliated with the REIT Corporation. The
beneficiary of the Trust (the "Beneficiary") will be one or more charitable
organizations that are named by the REIT Corporation.
Excess Stock will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trust will receive all dividends
and distributions on the Excess Stock and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Trustee will
vote all Excess Stock. The Trustee will designate a permitted transferee of
the Excess Stock, provided that the permitted transferee (i) purchases such
Excess Stock for valuable consideration and (ii) acquires such Excess Stock
without such acquisition resulting in a transfer to another Trust and resulting
in the redesignation of such shares of Common Stock or Preferred Stock as
Excess Stock.
The Prohibited Owner with respect to Excess Stock will be required to
repay the Trust the amount of any dividends or distributions received by the
Prohibited Owner (i) that are attributable to any Excess Stock and (ii) the
record date for which was on or after the date that
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such shares became Excess Stock. The Prohibited Owner generally will receive
from the Trustee the lesser of (a) the price per share such Prohibited Owner
paid for the shares of Common Stock or Preferred Stock that were designated
as Excess Stock (or, in the case of a gift or devise, the Market Price (as
defined below) per share on the date of such transfer) and (b) the price per
share received by the Trustee from the sale of such Excess Stock. Any
amounts received by the Trustee in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.
The Excess Stock will be deemed to have been offered for sale to the REIT
Corporation, or its designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that created such Excess Stock (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the REIT
Corporation, or its designee, accepts such offer. The REIT Corporation will
have the right to accept such offer for a period of 90 days after the later of
(i) the date of the purported transfer which resulted in such Excess Stock and
(ii) the date the Company determines in good faith that a transfer resulting in
such Excess Stock occurred.
"Market Price" means the average of the Closing Price for the ten
consecutive trading days immediately preceding the relevant date. "Closing
Price" on any day shall mean the last sale price, regular way on such day, or,
if no such sale takes place on that day, the average of the closing bid and
asked prices, regular way, in either case as reported on the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the NYSE, or if the affected class or series of capital
stock is not so listed or admitted to trading, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange (including the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation System) on which the affected class or series of capital stock is
listed or admitted to trading or, if the affected class or series of capital
stock is not so listed or admitted to trading, the last quoted price or, if not
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in
use, the principal automated quotation system then in use or, if the affected
class or series of capital stock is not so quoted by any such system, the
average of the closing bid and asked prices as furnished by a professional
market maker selected by the REIT Board making a market in the affected class
or series of capital stock, or, if there is no such market maker or such
closing prices otherwise are not available, the fair market value of the
affected class or series of capital stock as of such day, as determined by the
REIT Board in its discretion.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediate written notice to the REIT
Corporation of such event and (ii) to provide to the REIT Corporation such
other information as the REIT Corporation may request in order to determine the
effect, if any, of such transfer on the REIT Corporation's status as a REIT.
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The Articles require all persons who own, directly or indirectly, more
than 5% (or such lower percentages as required pursuant to regulations under
the Code) of the outstanding shares of Common Stock and Preferred Stock, within
30 days after January 1 of each year, to provide to the REIT Corporation a
written statement or affidavit stating the name and address of such direct or
indirect owner, the number of shares of Common Stock and Preferred Stock owned
directly or indirectly, and a description of how such shares are held. In
addition, each direct or indirect shareholder shall provide to the REIT
Corporation such additional information as the REIT Corporation may request in
order to determine the effect, if any, of such ownership on the REIT
Corporation's status as a REIT and to ensure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates
in a public offering of such shares. In addition, the REIT Board, upon receipt
of a ruling from the IRS or an opinion of counsel and upon such other
conditions as the REIT Board may direct, may exempt a person from the Ownership
Limitation under certain circumstances. However, the REIT Board may not grant
an exemption from the Ownership Limit to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the REIT
Corporation in excess of the Ownership Limit would result in the termination of
the REIT Corporation's status as a REIT. The foregoing restrictions will
continue to apply until (i) the REIT Board determines that it is no longer in
the best interests of the REIT Corporation to attempt to qualify, or to
continue to qualify, as a REIT and (ii) there is an affirmative vote of a
majority of the votes entitled to be cast on such matter at a regular or
special meeting of the stockholders of the Company.
All certificates representing shares of Common Stock or Preferred Stock
will bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium for their shares over the then-prevailing
market price or which these holders might believe to be otherwise in their best
interest.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE REIT CORPORATION'S ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of the MGCL and the
Articles and the REIT Corporation's Bylaws. This summary does not purport to
be complete and is subject to and qualified in its entirety by reference to the
Articles and the REIT Corporation's Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus constitutes a
part. See "Available Information."
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of the REIT Corporation
shall be as set forth in the Articles or as may be established by the REIT
Board but may not be fewer than
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the minimum number required by Maryland law (currently three) nor more than
15. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the directors then in
office. The stockholders may elect a director to fill a vacancy on the REIT
Board which results from the removal of a director. Pursuant to the terms of
the Articles, following the IPO, the directors will be divided into three
classes. One class will hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1998, another class will hold
office initially for a term expiring at the annual meeting of stockholders to
be held in 1999 and another class will hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2000. As the
term of each class expires, directors in that class will be elected for a
term of three years. The REIT Corporation believes that classification of
the REIT Board will help to assure the continuity and stability of the REIT
Corporation's business strategies and policies as determined by the REIT
Board.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the REIT Corporation, even though such an attempt might be
beneficial to the REIT Corporation and its stockholders. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the REIT Board. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Further, holders of shares of Common Stock will have no right to
cumulative voting for the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of shares of Common Stock
will be able to elect all of the successors of the class of directors whose
term expires at that meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles limit the liability of the REIT Corporation's directors and
officers to the REIT Corporation and its stockholders to the fullest extent
permitted from time to time by the MGCL. The MGCL presently permits the
liability of directors and officers to a corporation or its stockholders for
money damages to be limited, except (i) to the extent that it is proved that
the director or officer actually received an improper benefit or profit or (ii)
to the extent that a judgment or other final adjudication is entered adverse to
the director or officer in a proceeding based on a finding that the director's
or officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. This provision does not limit the ability of the REIT Corporation
or its stockholders to obtain other relief, such as an injunction or
rescission.
The Articles require the REIT Corporation to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by the MGCL. The MGCL permits a corporation, subject to certain
exceptions, to indemnify its directors, officers and certain other parties
against judgments, penalties, fines, settlements and reasonable expenses,
including attorneys' fees, actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service to or
at the request of the corporation, unless it is established that (i) the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate
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dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified
party had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made
with respect to any proceeding in which the director or officer has been
adjudged to be liable to the corporation. In addition, a director or officer
may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer
was adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation
prior to judgment, creates a rebuttable presumption that the director or
officer did not meet the requisite standard of conduct required for
indemnification to be permitted. It is the position of the Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate or associate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate thereof, are prohibited for five years after the most recent
date on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation voting together as a single voting group and (ii)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Stockholder
with whom the business combination is to be effected, unless, among other
things, the corporation's stockholders receive a minimum price (as defined in
the MGCL) for their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the board of directors of the corporation
prior to the time that the Interested Stockholder becomes an Interested
Stockholder. The Bylaws of the REIT Corporation contain a provision exempting
from these provisions of the MGCL any business combination involving QSV (or
its affiliates) or any other person acting in concert as a group with any of
the foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of
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two-thirds of the votes entitled to be cast on the matter, excluding shares
of stock owned by the acquirer, by officers or by directors who are employees
of the corporation. "Control shares" are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by such
person, or in respect of which such person is able to exercise or direct the
exercise of voting power, would entitle the acquirer to exercise voting power
in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority, or (iii) a majority. Control shares do not include
shares the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the MGCL,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for control shares, as of the date of the last control
share acquisition or of any meeting of stockholders at which the voting rights
of such shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquirer becomes entitled
to vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the shares as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiring person in the control share acquisition, and
certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
AMENDMENT TO THE ARTICLES
The Articles may be amended by the affirmative vote of the holders of a
majority of all shares entitled to be voted on the matter, except for the
provision relating to the classification of the REIT Board which may be amended
only by the affirmative vote of the holders of not less than two-thirds of all
shares entitled to be voted on the matter.
DISSOLUTION OF THE COMPANY
The Articles permit the dissolution of the REIT Corporation by (i) the
affirmation or vote of a majority of the entire REIT Board declaring such
dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of
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stockholders and (ii) upon proper notice, stockholder approval by the
affirmative vote of the holders of not less than a majority of all of the
votes entitled to be cast on the matter or the written consent of all the
votes entitled to be cast on this matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The REIT Corporation's Bylaws provide that with respect to an annual
meeting of stockholders, nominations of persons for election to the REIT Board
and the proposal of business to be considered by stockholders may be made only
(i) by, or at the direction of, a majority of the REIT Board or (ii) by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the REIT Corporation's Bylaws.
The provisions in the Articles on classification of the REIT Board, the
business combination and control share acquisition provisions of the MGCL and
the advance notice provisions of the REIT Corporation's Bylaws could have the
effect of discouraging a takeover or other transaction in which holders of
some, or a majority, of the shares of Common Stock might receive a premium for
their shares of Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests.
MEETINGS OF STOCKHOLDERS
Beginning in 1998, an annual meeting of the stockholders for the election
of directors and the transaction of any business within the powers of the REIT
Corporation shall be held on the last Thursday in April or such date within 30
days of such day as set by the REIT Board.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the REIT Board,
by the Chief Executive Officer of the REIT Corporation, by the President of the
REIT Corporation, by the REIT Board pursuant to a resolution adopted by a
majority of all directors or by the Secretary of the REIT Corporation upon the
written request of the holders of 25% or more of the outstanding voting stock.
Such request shall state the purpose or purposes of such meeting and the
matters proposed to be acted upon at such meeting.
COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
GENERAL
USRP is organized as a Delaware limited partnership and the REIT
Corporation is organized as a corporation under the laws of the State of
Maryland. As a Delaware limited partnership, USRP is subject to the Delaware
Revised Uniform Limited Partnership Act (the "Delaware RULPA"). As a Maryland
corporation, the REIT Corporation is subject to the MGCL.
The discussion of the comparative rights of Unitholders of the Partnership
and stockholders of the REIT Corporation set forth below does not purport to be
complete and is
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subject to and qualified in its entirety by reference to the Delaware RULPA
and the MGCL and also to the Master Partnership Agreement of USRP and the
Articles and Bylaws of the REIT Corporation.
The REIT Corporation has been organized under the MGCL pursuant to Articles
of Incorporation filed January 29, 1997.
MANAGEMENT
The Master Partnership Agreement of USRP provides that, with certain
limited exceptions, the Managing General Partner has exclusive discretion to
manage and control the business and affairs of the Partnership. The Managing
General Partner may be removed for cause upon the affirmative vote of more than
fifty percent (50%) of the total number of all outstanding Units held by all
Limited Partners of record. "Cause," for purposes of the Master Partnership
Agreement, means actual fraud, gross negligence, or willful or wanton
misconduct. The Managing General Partner may be removed without cause upon the
affirmative vote of more than eighty percent (80%) of the total number of all
outstanding Units held by all Limited Partners of record. The directors of the
Managing General Partner are elected by the stockholders of the Managing
General Partner.
Pursuant to the MGCL, the business and affairs of a corporation are
managed by or under the direction of its board of directors. The MGCL further
provides that the board of directors may be divided into classes. In
accordance with this authority, the Articles provides for three classes of
directors. The Articles provide that the number of directors of the REIT
Corporation cannot be less than three (3) nor more than fifteen (15). Under
the Articles, the directors are divided in three classes, as nearly equal in
number as possible, with the term of one class expiring at each annual meeting
of stockholders. At each annual meeting of stockholders, one class of
directors will be elected for a term of three years and the directors in the
other two classes will continue in office. Under the Articles, a director may
be removed, for cause only, at a meeting of stockholders called for that
purpose, by the holders of not less than two-thirds of the outstanding Common
Stock entitled to vote in the election of directors. As a result, a greater
vote will be required to change management of the Company following the
Conversion. See "Risk Factors--Comparative Rights of the Units and Common
Stock." "Cause," for purposes of the Articles, means acts or omissions
constituting active and deliberate dishonesty established by a final judgment
or actual receipt of an improper benefit or profit in money, property or
services. Any vacancy (including a vacancy created by an increase in the
number of directors) will be filled, at any regular meeting or any special
meeting of the directors called for that purpose, by a majority of the REIT
Board.
VOTING RIGHTS
Under the Master Partnership Agreement, Limited Partners have voting
rights with respect to (i) the removal and replacement of the General Partners;
(ii) the merger of USRP; (iii) the sale of substantially all of USRP's assets;
(iv) the dissolution of USRP or the Operating Partnership; and (v) material
amendments to the Partnership Agreements. Each Unit entitles the Limited
Partner to cast one vote on all matters presented to the Limited Partners.
Generally, approval of
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matters submitted to the Limited Partners requires the affirmative vote of
Limited Partners owning more than 50% of the Units then outstanding. Certain
limited matters require the approval of a specified super-majority of the
Units then outstanding.
The Articles provide that the stockholders of the REIT Corporation shall
be entitled to vote only on the following matters: (i) election or removal of
directors; (ii) amendment of the Articles (except as described below under "--
Amendment of Master Partnership Agreement and Articles of Incorporation");
(iii) termination of the REIT Corporation's existence; (iv) reorganization of
the REIT Corporation; and (v) merger, consolidation or share exchange of the
REIT Corporation, or the sale or disposition of substantially all of the REIT
Corporation's assets. Generally, matters submitted to the stockholders require
the affirmative vote of stockholders holding a majority of the outstanding
Common Stock present in person or by proxy entitled to vote thereon at a duly
convened meeting of stockholders.
The Bylaws of the REIT Corporation require notice at least 60 days and not
more than 90 days before the anniversary of the prior annual meeting of
stockholders in order for a stockholder (a) to nominate a director or (b) to
propose new business other than pursuant to notice of the meeting. The Bylaws
contain a similar notice requirement in connection with the nomination of
directors at a special meeting of stockholders called for the purpose of
electing one or more directors. Accordingly, failure to act in compliance with
the notice provisions will make stockholders unable to nominate directors or
propose new business. There is no similar provision in the Master Partnership
Agreement.
SPECIAL MEETINGS
Special meetings of Limited Partners may be called by the Managing General
Partner or by Limited Partners owning at least 20% of the outstanding Units.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the REIT Board,
by the Chief Executive Officer of the REIT Corporation, by the President of the
REIT Corporation, by the REIT Board pursuant to a resolution adopted by a
majority of all directors or by the Secretary of the REIT Corporation upon the
written request of the holders of 25% or more of the outstanding voting stock.
Such request shall state the purpose or purposes of such meeting and the
matters proposed to be acted upon at such meeting.
AMENDMENT OF MASTER PARTNERSHIP AGREEMENT AND ARTICLES OF INCORPORATION
The Master Partnership Agreement may be amended solely by action of the
Managing General Partner to reflect: (i) a change in the name of USRP or the
location of the principal place of business of USRP; (ii) the admission,
substitution, termination or withdrawal of partners in accordance with the
Master Partnership Agreement; (iii) a change that is necessary to qualify USRP
as a limited partnership or a partnership in which the Limited Partners have
limited liability under the laws of any state or that is necessary or advisable
in the opinion of the Managing General Partner to ensure that USRP will not be
treated as an association taxable as
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a corporation for federal income tax purposes; (iv) a change that is (a) of
an inconsequential nature and does not adversely affect the Limited Partners
in any material respect; (b) necessary or desirable to cure any ambiguity, to
correct or supplement any provision of the Master Partnership Agreement that
would be inconsistent with any other provision of the Master Partnership
Agreement or to make any other provision with respect to matters or questions
arising under the Master Partnership Agreement that will not be inconsistent
with the provisions of the Master Partnership Agreement; (c) necessary or
desirable to satisfy any requirements, conditions or guidelines contained in
any opinion, directive, order, ruling or regulation of any Federal, state or
local agency or contained in any Federal, state or local law; (d) necessary
or desirable to facilitate the trading of the Units or comply with any rule,
regulation, guideline or requirement of any securities exchange on which the
Units are or will be listed for trading, compliance with any of which the
Managing General Partner deems to be in the interests of USRP and the Limited
Partners; or (e) required or contemplated by the Master Partnership
Agreement; (v) a change in any provision of the Master Partnership Agreement
which requires any action to be taken by or on behalf of the Managing General
Partner or USRP pursuant to the requirements of applicable Delaware law if
the provisions of applicable Delaware law are amended, modified or revoked so
that the taking of such action is no longer required; or (vi) any other
amendments similar to the foregoing. In all other cases, an amendment to the
Master Partnership Agreement must generally be approved by Limited Partners
holding a majority of the Units then outstanding. In certain limited
circumstances, a proposed amendment to the Master Partnership Agreement may
only be effected by a specified super-majority vote of the Limited Partners.
Even in cases where Limited Partner approval is required, no amendment may be
effected without the approval of the Managing General Partner.
An amendment to the Articles (other than the provision relating to the
classification of the REIT Board) requires the recommendation of the REIT Board
and the affirmative vote of a majority of the outstanding Common Stock present
in person or by proxy entitled to vote at a duly convened meeting of
stockholders. An amendment to the provision of the Articles relating to the
classification of the REIT Board requires the recommendation of the REIT Board
and the affirmative vote of two-thirds of all shares of Common Stock entitled
to be voted on the matter.
As a result of these differences with respect to voting rights and
procedures to amend the charter documents of USRP and the REIT Corporation, the
REIT Corporation's policies with respect to investments, financings, affiliate
transactions and certain other activities may be amended or revised from time
to time at the discretion of the REIT Board without a vote of the stockholders
of the REIT Corporation, while any such change in investment policy by USRP
would necessitate amending the Master Partnership Agreement requiring a vote of
Limited Partners. Therefore, although it has no current intention to do so,
the REIT Board could alter the investment policies of the Company so that it no
longer invests in restaurant properties.
LIMITED LIABILITY
Pursuant to the Delaware RULPA, Limited Partners are not liable for the
obligations of USRP unless they are also a general partner or, in addition to
the exercise of rights and powers as a Limited Partner, they participate in the
control of USRP. However, if a Limited Partner does participate in the control
of USRP, he is liable only to persons who transact business with
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USRP reasonably believing, based upon the Limited Partner's conduct, that the
Limited Partner is a general partner.
Pursuant to the MGCL and the Articles, the personal liability of the
stockholders of the REIT Corporation is limited to the fullest extent permitted
from time to time by the MGCL.
While Delaware law and Maryland law, respectively, afford Limited Partners
in USRP and stockholders in the REIT Corporation protection against personal
liability for obligations of USRP and the REIT Corporation, certain
jurisdictions may not recognize limitations on personal liability to the extent
such claims are not satisfied by USRP or the REIT Corporation. The Board of
Directors believes that any risk of personal liability would generally be
limited to situations in which USRP's or the REIT Corporation's public
liability insurance coverage would be insufficient to satisfy claims.
DISSOLUTION OF THE PARTNERSHIP AND THE REIT CORPORATION AND TERMINATION OF
REIT STATUS
Under the terms of the Master Partnership Agreement, the Limited Partners
may compel the dissolution of USRP prior to the expiration of its term on
December 31, 2035 by the affirmative vote of more than fifty percent (50%) of
the total number of all outstanding Units held by all Limited Partners of
record. USRP is subject to dissolution upon a sale of all or substantially all
of USRP's properties, which sale may be made with the approval of the Managing
General Partner and a majority in interest of the Limited Partners.
The MGCL permits the voluntary dissolution of the REIT Corporation by the
affirmative vote of the holders of not less than two-thirds of the outstanding
Common Stock at a meeting of stockholders called for that purpose. A merger,
consolidation or sale of substantially all of the assets of the REIT
Corporation must be approved by the affirmative vote of the holders of not less
than a majority of the outstanding Common Stock at a meeting of stockholders
called for that purpose.
The Articles permit the REIT Board to terminate the status of the REIT
Corporation as a REIT under the Code at any time. Consequently, although both
Limited Partners and stockholders have voting rights with regard to the
dissolution of USRP and of the REIT Corporation, respectively, such voting
rights differ in limited respects.
LIQUIDATION RIGHTS
In the event of liquidation of USRP, holders of all Units and the Managing
General Partner would be entitled to share ratably, in accordance with their
percentage interests, in any assets remaining after the satisfaction of
obligations to creditors.
In the event of liquidation of the REIT Corporation, the holders of Common
Stock would be entitled to share ratably in any assets remaining after
satisfaction of obligations to creditors and any liquidation preferences on any
series of Preferred Stock that may then be outstanding.
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LIMITATIONS OF LIABILITY OF GENERAL PARTNERS AND TRUSTEES
The Master Partnership Agreement provides that the Managing General
Partner, its affiliates and all officers, directors, employees and agents of
the Managing General Partner and its affiliates shall not be liable to USRP or
the Limited Partners for losses sustained or liabilities incurred as a result
of any acts or omissions of the Managing General Partner or such other persons
if the conduct of the applicable person did not constitute acts of actual
fraud, gross negligence, or willful or wanton misconduct and the applicable
person acted in good faith and in a manner it believed to be in, or not opposed
to, the interests of the Partnership.
The Articles contain a provision eliminating the personal liability of a
director to the REIT Corporation or its stockholders for monetary damages to
the fullest extent permitted by Maryland statutory or decisional law, as
amended or interpreted.
INDEMNIFICATION
The Master Partnership Agreement provides that USRP shall indemnify and
hold harmless the Managing General Partner, its affiliates and all officers,
directors, employees and agents of the Managing General Partner and its
affiliates to the maximum extent permitted by law provided that the
indemnitee's conduct did not constitute actual fraud, gross negligence, or
willful or wanton misconduct and provided further that the indemnitee acted in
good faith and in a manner it believed to be in, or not opposed to, the
interests of USRP, and, with respect to any original proceeding, had no
reasonable cause to believe its conduct was unlawful.
The Articles provide that the REIT Corporation shall provide any
indemnification permitted by the laws of the State of Maryland and shall
indemnify directors, officers, agents and employees as follows: (i) the REIT
Corporation shall indemnify its directors and officers, whether serving the
REIT Corporation or at its request and any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (ii) the REIT Corporation shall
indemnify other employees and agents, whether serving the REIT Corporation or
at its request any other entity, to such extent as shall be authorized by the
REIT Board or the REIT Corporation's Bylaws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled.
DERIVATIVE ACTIONS
The Delaware RULPA allows a Limited Partner to institute legal action on
behalf of USRP (a derivative action) to recover damages from a third party or
from a general partner where the general partner has failed to institute the
action. In addition, a Limited Partner may institute legal action on behalf of
himself and other similarly situated Limited Partners (a class action) to
recover damages from a General Partner for violations of his fiduciary duties
to the Limited Partners. Limited Partners may also have rights to bring
actions in Federal court to enforce Federal rights.
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Under the MGCL, a stockholder may bring an action on behalf of the REIT
Corporation to recover a judgment in its favor (a derivative action) where the
directors have failed to institute the action. The provisions of the MGCL
relating to derivative actions are substantially similar to the provisions of
the Delaware RULPA relating to such actions.
INSPECTION OF BOOKS AND RECORDS
Upon twenty (20) days prior written notice, at his own expense and for a
valid business purpose related to the conduct of USRP's business, a Limited
Partner may have access to non-confidential, non-proprietary information
regarding USRP, including tax returns, a current list of the name and last
known business, residence or mailing address of each partner, a copy of USRP's
governing instruments, and certain other information regarding the affairs of
USRP. The foregoing is subject to the Managing General Partner's right to keep
confidential from Limited Partners, for such period of time as the Managing
General Partner deems reasonable, any information which the Managing General
Partner reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the Managing General Partner in good faith
believes is not in the best interests of USRP or could damage USRP or its
business.
Similarly, upon written request, at a stockholder's own expense and for a
proper purpose reasonably related to that stockholder's interest as a
stockholder in the REIT Corporation, any person who is a stockholder of record
of the REIT Corporation will be granted the right to examine and copy relevant
books, minutes and stock transfer records, including a list of stockholders of
the REIT Corporation.
DISTRIBUTIONS AND DIVIDENDS
Distributions and dividends on the Units and the Common Stock may be paid
if, as and when declared by the Managing General Partner or the REIT Board, as
applicable, in its discretion.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations affecting the Unitholders as a result of the Conversion. This
discussion is directed principally at Unitholders who are United States
citizens or residents or domestic corporations, and does not address in all
material respects considerations that might adversely affect the treatment of
Unitholders who are subject to special treatment under the tax laws (such as
insurance companies, cooperatives, financial institutions, broker-dealers, tax
exempt organizations or foreign investors). The discussion in this section is
based on existing provisions of the Code, existing and proposed Treasury
Regulations (the "Regulations"), existing court decisions and existing rulings
and other administrative interpretations. There can be no assurance that
future Code provisions or other legal authorities will not alter significantly
the tax consequences described below. Except for the Ruling requested in
connection with the Merger Alternative as described elsewhere in this Proxy
Statement/Prospectus, no rulings have been, or will be, obtained from the IRS
concerning any of the matters discussed in this section. Because the following
represents only a summary, it is qualified in its entirety by the applicable
provisions of the Code and
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regulations, court decisions and IRS rulings and other IRS pronouncements.
Winstead Sechrest & Minick P.C., tax counsel to the Company, is of the
opinion that, except for statements of fact or as otherwise specifically
noted, all information contained under this caption "Federal Income Tax
Considerations" is correct in all material respects. Unlike a tax ruling
(which will not be sought, except as otherwise described herein), an opinion
of counsel, which is based on counsel's review and analysis of existing law,
is not binding on the IRS. Accordingly, no assurance can be given that the
IRS would not successfully challenge the opinions set forth herein.
Each Unitholder is advised to consult his own tax advisor about the
federal, state, local, foreign and other tax consequences relating to the
Conversion.
A. THE MERGER ALTERNATIVE
1. QUALIFICATION AS NONRECOGNITION TRANSACTION
It is a condition precedent to the consummation of the Merger that the
Managing General Partner shall have received a favorable ruling from the IRS
and an opinion of Winstead Sechrest & Minick P.C., as tax counsel, to the
effect that the Merger will be treated as part of a "tax-free" transaction
described in Section 351 of the Code. Section 351(a) of the Code sets forth
the general rule that no gain or loss will be recognized by one or more persons
transferring assets to a corporation solely in exchange for the corporation's
stock if, immediately after the exchange, the transferors are "in control" of
the transferee corporation. "Control" is defined as the ownership of stock
possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number
of shares of all other classes of stock of the corporation. For purposes of
the ruling request and its tax opinion, tax counsel will assume that not more
than 20% of the Common Stock transferred to the Unitholders and the Managing
General Partner pursuant to the Merger will subsequently be sold pursuant to
plans or arrangements entered into prior to the Merger. Neither USRP nor the
Managing General Partner is aware of any plans or arrangements that have been
or will be entered into prior to the Merger which would make this assumption
incorrect. The IRS has taken the position in a revenue ruling that the
distribution by a partnership of the stock received in a Section 351 exchange
to its partners in liquidation of the partnership will not violate the control
requirement.
There are two alternative approaches by which the IRS may rule that the
Merger qualifies as a transaction described in Section 351 of the Code. Tax
counsel cannot opine as to which alternative approach the IRS might select.
Nevertheless, the tax consequences of the two alternatives are similar, but not
exactly the same. Under one alternative construction (the "Transfer of
Partnership Interests Approach"), the IRS would treat the Merger as if each of
the Unitholders had transferred Units to the Reit Corporation in exchange for
Common Stock. Under the second alternative (the "Transfer of Assets
Approach"), the Merger will be treated as if USRP transferred its assets and
liabilities to the Reit Corporation in exchange for Common Stock followed by a
distribution of the Common Stock by USRP to the Unitholders and the Managing
General Partner in liquidation of USRP.
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Even in the case of a qualified Section 351 exchange, gain will be
recognized by the transferor if and to the extent that the amount of the
liabilities assumed and taken subject to by the transferee exceeds the
aggregate adjusted basis of the property transferred in the exchange. Gain
recognized, if any, must be reported as ordinary income, long-term capital
gain, or short-term capital gain according to the nature and the holding period
of the transferred property.
Section 351(a) does not apply to transfers of property to an investment
company. A REIT is an investment company if the transfer results, directly or
indirectly, in "diversification" of the transferors' interests. The purpose of
this restriction is to prevent the tax-free pooling of investment assets by
more than one transferor. The Ruling from the IRS and the opinion of tax
counsel will assume the accuracy of the Managing General Partner's
representations that at the time of the Merger there will not be an existing
plan or arrangement (i) to achieve diversification of USRP's (or the
Unitholders') interests in one or more additional nonrecognition transactions,
(ii) to issue additional Common Stock except pursuant to the Company's dividend
reinvestment plan, if any, and pursuant to compensatory stock options that may
be granted by the REIT Corporation to key service providers, or (iii) to
acquire any additional specific property.
If the REIT Corporation were to be treated as an investment company or for
some other reason Section 351 did not apply to the Merger, USRP would recognize
taxable gain or loss in an amount equal to the difference between the total
value of the consideration received (the amount of liabilities assumed and
taken subject to by the REIT Corporation in the Merger plus the fair market
value of the Common Stock received in the exchange) and the adjusted basis in
the assets transferred to the REIT Corporation. See "--The Merger Alternative
- --Tax Consequences to Unitholders--Potential Gain Recognition." Neither USRP nor
the Unitholders would recognize gain or loss upon the deemed distribution of
the Common Stock.
2. TAX CONSEQUENCES TO USRP
NONRECOGNITION AND TERMINATION. If the Merger is treated as a
nonrecognition transaction under Section 351, (a) USRP will not recognize gain
under the Transfer of Partnership Interests Approach and (b) USRP will not
recognize gain under the Transfer of Assets Approach except to the extent (if
any) that the liabilities to which the transferred property is subject plus the
liabilities assumed by the REIT Corporation in connection with the Merger
exceed the total adjusted basis of the property transferred. It is expected
that USRP's aggregate adjusted basis in its assets will exceed the sum of such
liabilities at the time of the Merger. USRP elected pursuant to Section 754
of the Code to adjust the basis of partnership property with respect to
transferee partners in the case of a sale or exchange or a transfer upon the
death of a partner of a partnership interest. See "--The Exchange Alternative
- --Tax Treatment of Operations--Section 754 Election." Although there is some
uncertainty as to the impact of these basis adjustments at the USRP level, USRP
will treat these amounts as part of USRP's aggregate adjusted basis in its
assets for purposes of determining whether gain is recognized upon the Merger.
USRP can only estimate the amount of these adjustments because of the imprecise
information available concerning transfers of Units in the context of a
publicly-traded partnership. It is estimated, however, that such adjustments
in the aggregate are substantial and that if the adjustments are excluded from
USRP's adjusted basis in its assets, there is a risk that USRP would recognize
gain in the Merger. See "--The Merger Alternative--Tax Consequences to
Unitholders--Potential
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Gain Recognition" and "--The Merger Alternative--Tax Consequences to USRP."
It is likely that any gain recognized by USRP would be treated as long term
capital gain.
For federal income tax purposes, under the Transfer of Assets Approach
USRP will be deemed to have received the Common Stock and distributed it to its
partners pursuant to a liquidation of USRP. USRP will not recognize gain or
loss in the deemed liquidation and will terminate upon the distribution of the
Common Stock pursuant to the Merger.
PRE-MERGER TAX TERMINATION OF THE PARTNERSHIP. Section 708 of the Code
provides that if 50% or more of the capital and profits interests in a
partnership are sold or exchanged within a single twelve-month period, the
partnership will be deemed to terminate for tax purposes. It is possible that
Units representing 50% or more of the capital and profits interests in USRP
have been or might be sold or exchanged within a single twelve-month period
prior to the Merger. The foregoing discussion of tax consequences to USRP of
the Merger assumes that no such termination has occurred or will occur prior to
the Merger.
Upon a termination of USRP for tax purposes, it would be deemed to have
distributed its assets on the date of such termination to the Managing General
Partner and the Unitholders who would then be deemed to have contributed such
assets to a new partnership. The new partnership would have a new basis in its
assets (other than money) equal to the aggregate basis of the Managing General
Partner and the Unitholders in their interests in USRP, less any cash deemed
distributed to such persons in connection with the termination. Accordingly,
if the total basis of the Managing General Partner and Unitholders in their
interests in USRP were greater or less than USRP's aggregate basis in its
assets immediately prior to the termination, the new partnership's basis in its
assets after the termination would be increased or reduced correspondingly.
Moreover, the new partnership's basis in its assets following the termination
might have to be reallocated among the various assets to reflect the relative
fair market values of those assets at the time of termination, which may be
less favorable than the previous allocation of basis made in connection with
USRP's original acquisition of such assets. A termination of USRP could also
cause USRP or its assets to become subject to unfavorable changes in the
Federal income tax law made prior to the termination (E.G., a lengthening of
the period over which assets are depreciated) but previously not applicable to
USRP or its assets because of protective transition rules. Elections made by
the terminated partnership would not be applicable to the reconstituted
partnership, including the election made by USRP under Section 754 of the Code.
USRP would incur additional accounting and administrative costs with respect to
the filing of a tax return for the year ending on the date of a technical
termination. See "--The Exchange Alternative--Tax Treatment of Operations."
3. TAX CONSEQUENCES TO UNITHOLDERS
GENERAL NONRECOGNITION. It is a condition precedent to consummation of
the Merger that the IRS issue a favorable ruling as to treatment of the Merger
as part of a transaction described in Section 351 of the Code. As a result of
the treatment of the Merger as a nonrecognition transaction under Section 351,
the Merger will generally be tax-free to the Unitholders except as described
below. See "--Potential Gain Recognition." The Unitholders will not recognize
gain or loss upon the receipt of Common Stock in the Merger.
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POTENTIAL GAIN RECOGNITION. If the Merger qualifies for nonrecognition
treatment under Section 351, under the Transfer of Assets Approach, any gain
recognized by USRP would be allocated to the Unitholders and the Managing
General Partner. See "--The Merger Alternative--Qualification as
Nonrecognition Transaction" and "--The Merger Alternative--Tax Consequences to
USRP." Certain Unitholders may recognize gain on the Merger under either the
Transfer of Partnership Interests Approach or the Transfer of Assets Approach
(even if USRP does not recognize any gain), as follows:
(a) Upon the Merger, Unitholders will be deemed to receive a cash
distribution equal to their share of USRP's nonrecourse indebtedness,
which generally will be offset by the inclusion of that share of
indebtedness in their adjusted basis in their Units. Any Unitholder,
however, whose adjusted basis in his Units at the time of the Merger is
less than his share of such indebtedness (I.E., a Unitholder who has a
deficit capital account for tax purposes after reflecting any basis
adjustments under Section 754 of the Code) will recognize gain to the
extent of this difference.
(b) USRP has elected pursuant to Section 754 of the Code to adjust
the basis of partnership property with respect to transferee partners upon
the sale or exchange or transfer upon death of a partner of a partnership
interest. If as a result of such adjustments, a Unitholder's share of
USRP's liabilities assumed by the REIT Corporation exceeds his tax basis
in his share of USRP's assets, the Unitholder will recognize gain to the
extent of the excess. This result is unlikely for most Unitholders of
USRP, although tax counsel cannot opine as to this factual outcome for
each Unitholder. See "--The Exchange Alternative--Tax Consequences of
Unit Ownership."
If for any reason the Merger did not qualify for nonrecognition treatment
under Section 351, (a) under the Transfer of Partnership Interests Approach,
the Unitholders and Managing General Partner would recognize gain or loss as if
they had sold their interests in USRP to the Reit Corporation for an amount
equal to the value of the Common Stock received by the Unitholders and Managing
General Partner in the Merger plus their share of the amount of liabilities
assumed or taken subject to by the Reit Corporation in the Merger; and (b)
under the Transfer of Assets Approach, USRP would recognize gain or loss on the
transfer of its assets to the REIT Corporation as if USRP had sold the assets
for an amount equal to the value of the Common Stock received by the
Unitholders and Managing General Partner in the Merger, plus the amount of
liabilities assumed or taken subject to by the REIT Corporation in the Merger.
Such gain recognized would be allocated among the Unitholders and the Managing
General Partner. Each Unitholder's basis in the Common Stock received would be
increased (or reduced) by the gain (or loss) recognized. Each Unitholder's
holding period in the Common Stock received would begin on the day after the
Merger.
ALLOCATION OF GAIN RECOGNIZED. If any gain were to be recognized by USRP
in the Merger, the gain (determined without regard to Section 754 adjustments)
generally would be allocated among the partners until their capital accounts
were equal to the fair market value of the Common Stock to be received in the
Merger.
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SUSPENDED DEDUCTIONS. Any loss previously allocated to a Unitholder in
prior years or during the tax year of the Merger that has not been used because
of the at-risk or basis limitations can be used only to the extent of any
income or gain recognized on the Merger. Generally, Unitholders subject to the
passive activity loss limitations would be able to utilize suspended passive
losses from USRP to offset gain that they might be required to recognize on the
Merger. Any passive losses not so used may not be available until the
Unitholder disposes of his entire interest in the REIT Corporation.
TAX BASIS IN COMMON STOCK. A Unitholder's aggregate tax basis in all
Common Stock received in the Merger will equal his aggregate basis in Units
minus his share of partnership liabilities, after adjustment for operations
during the taxable year of the Merger and any gain or loss recognized on the
Merger, but in any case not less than zero. This basis will be prorated among
all Common Stock received by the Unitholder.
HOLDING PERIOD IN COMMON STOCK. The holding period required for long-term
capital gains treatment is more than one year. For holding period purposes,
each share of Common Stock will be divided into two parts. Generally, one part
will be the portion of the value of the Common Stock that is attributable to
any ordinary income assets transferred by USRP in the Merger; its holding
period will begin on the day following the Merger. The remaining part will be
the portion of the value of the Common Stock that is attributable to capital
assets or Section 1231 property (generally property used in a trade or business
which has been held for more than one year and is subject to an allowance for
depreciation or is real property, other than inventory or property held
primarily for sale to customers in the ordinary course of the taxpayer's trade
or business) transferred in the Conversion; such part will have a holding
period which will include (a) under the Transfer of Partnership Interests
Approach, the holding period of the Unitholder in his Units and (b) under the
Transfer of Assets Approach, the holding period of USRP in the Common Stock
distributed. USRP's holding period in the Common Stock will include the period
the assets transferred were held by USRP, provided the assets were capital
assets or Section 1231 property on the date of the exchange. Thus, a portion
of each share of Common Stock distributed to a Unitholder will have a holding
period in the hands of the Unitholder which will include the holding period of
USRP in certain assets transferred to the REIT Corporation, while another
portion of each such share of Common Stock in the hands of the Unitholder will
have a holding period which will commence with the date following the Merger.
As a result, a sale or disposition of any such Common Stock by the Unitholder
within one year and one day after the date of the Merger will generate both
long-term and short-term capital gain or loss, as the case may be, to the
Unitholder.
4. TAX CONSEQUENCES TO THE REIT CORPORATION
NONRECOGNITION. The REIT Corporation will not recognize gain or loss on
its receipt of USRP's assets in exchange for the Common Stock. Following the
Merger, substantially all the assets and liabilities formerly owned by USRP
will be owned by the REIT Corporation through the Operating Partnership.
TAX BASIS AND HOLDING PERIOD IN ASSETS. The aggregate tax basis of the
REIT Corporation in its assets following the Merger should equal (a) under the
Transfer of Partnership
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Interests Approach, the Unitholders' and Managing General Partner's aggregate
tax basis in their interests in USRP on the date of the Merger increased by
any gain recognized by them on the Merger or (b) under the Transfer of Assets
Approach, USRP's aggregate tax basis in its assets on the date of the Merger
increased by any gain recognized by USRP on the Merger. The REIT
Corporation's holding period in the assets will include USRP's holding period.
DEPRECIATION DEDUCTIONS. The Merger will cause USRP to terminate for tax
purposes under Section 708(b)(1)(B) of the Code. Consequently, the REIT
Corporation will depreciate the transferred assets over longer lives than USRP
utilized. The REIT Corporation's basis in its assets will generate future tax
deductions to the REIT Corporation. Although Unitholders with relatively
higher bases in their Units may be viewed (through USRP's Section 754 election)
as having a greater share of such basis than other Unitholders, no
consideration has been given to the expected future tax benefits or detriments
in arriving at the number of shares of Common Stock to be received by each
Unitholder.
REPORTING REQUIREMENTS
Pursuant to Section 1.351-3(a) of the Regulations, either (a) each
Unitholder under the Transfer of Partnership Interests Approach or (b) USRP
under the Transfer of Assets Approach will be required to file with its income
tax return for the tax year of the Merger, a statement which includes a
description of (i) the assets transferred, (ii) the Common Stock received in
the exchange, and (iii) any liabilities (or share of liabilities) of USRP
assumed by the REIT Corporation pursuant to the Merger.
5. TAX CONSEQUENCES OF THE REIT CORPORATION'S QUALIFICATION AS A REIT
The REIT Corporation will elect to be treated as a REIT for federal income
tax purposes for its taxable year ending December 31, 1997, and for each
subsequent taxable year. Based on certain assumptions and representations that
are summarized below, Winstead Sechrest & Minick P.C., counsel to the Company,
is of the opinion that the REIT Corporation has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ending December 31, 1997 and that its proposed method of operations
described in this Proxy Statement/Prospectus will enable it to satisfy the
requirements for such qualification. The rules governing REITs are highly
technical and require ongoing compliance with a variety of tests that depend,
among other things, on future operating results. Winstead Sechrest & Minick
P.C. will not monitor the REIT Corporation's compliance with these
requirements. While the REIT Corporation expects to satisfy these tests, and
will use its best efforts to do so, no assurance can be given that the REIT
Corporation will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect the REIT Corporation and
its stockholders. See "--Failure to Qualify as a REIT." The following is a
summary of the material federal income tax considerations affecting the REIT
Corporation as a REIT and the Unitholders as its stockholders:
REIT QUALIFICATION. Entities like the REIT Corporation that invest
principally in real estate and that otherwise would be taxed as regular
corporations may elect to be treated as REITs when they satisfy certain
detailed requirements imposed by the Code. If the REIT Corporation
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qualifies for taxation as a REIT, it generally will not be subject to
corporate income tax to the extent the REIT Corporation currently distributes
its REIT taxable income to its stockholders. This treatment effectively
eliminates the "double taxation" (I.E., taxation at both the corporate and
stockholder levels) imposed on investments in most regular corporations. A
qualifying REIT, however, may be subject to certain excise and other taxes,
as well as to normal corporate tax on taxable income that is not currently
distributed to its stockholders. See "-- Taxation of the REIT Corporation as
a REIT." In addition, if the REIT Corporation fails to qualify as a REIT in
any taxable year, it will be subject to federal income tax at regular
corporate rates on all of its taxable income. The current maximum federal tax
rate for corporations is 35%, but that rate may increase.
GENERAL QUALIFICATION REQUIREMENTS. The REIT Corporation must be
organized as an entity that would, if it does not maintain its REIT status, be
taxable as a regular corporation. It cannot be a financial institution or an
insurance company. The REIT Corporation must be managed by one or more
directors. The REIT Corporation expects to meet, each of these requirements.
The REIT Corporation also expects to satisfy the requirements that are
separately described below concerning share ownership and reporting, the nature
and amounts of the REIT Corporation's income and assets and the levels of
required annual distributions.
SHARE OWNERSHIP; REPORTING. Beneficial ownership of the REIT Corporation
must be and is evidenced by transferable shares. The REIT Corporation's
capital stock must be held by at least 100 persons for approximately 92% of the
days in each taxable year. Not more than 50% of the value of the shares of
capital stock may be held, directly or indirectly, applying certain
constructive ownership rules, by five or fewer individuals at any time during
the last half of each of the REIT Corporation's taxable years. The REIT
Corporation is not required to satisfy these 100 person and 50% tests until its
second taxable year for which an election is made to be taxed as a REIT. The
REIT Corporation believes that its shares of Common Stock will be owned by a
sufficient number of investors and in appropriate proportions to permit it to
continue satisfying these requirements. To protect against violations of these
requirements, the Articles will provide that no person is permitted to own
(applying certain constructive ownership tests) more than 8.75% of the
outstanding Common Stock (except for QSV which can initially own up to 15% of
the outstanding Common Stock, subject to reduction under certain circumstances)
or 9.8% of the outstanding Preferred Stock. In addition, the Articles will
contain restrictions on transfers of capital stock, as well as provisions that
automatically convert shares of stock into nonvoting, non-dividend paying
Excess Stock to the extent that the ownership otherwise might jeopardize the
REIT Corporation's REIT status. Special rules for determining share ownership
apply to certain qualified pension and profit sharing trusts. See "--Taxation
of Tax Exempt Entities."
To monitor the REIT Corporation's compliance with the share ownership
requirements, the REIT Corporation is required to maintain records disclosing
the actual ownership of common shares. To do so, the REIT Corporation must
demand written statements each year from the record holders of certain
percentages of shares in which the record holders are to disclose the actual
owners of the shares (I.E., the persons required to include in gross income the
REIT dividends). A list of those persons failing or refusing to comply with
this demand must be maintained as part of the REIT Corporation's records.
Stockholders who fail or refuse to comply
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with the demand must submit a statement with their tax returns disclosing the
actual ownership of the shares and certain other information.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, the REIT Corporation also must meet three tests governing the sources of
its income. These tests are designed to ensure that a REIT derives its income
principally from passive real estate investments. In evaluating a REIT's
income, the REIT will be treated as receiving its proportionate share of the
income produced by any partnership in which the REIT invests, and any such
income will retain the character that it has in the hands of the partnership.
The Code allows the REIT Corporation to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Code provides that a qualified REIT subsidiary is not
treated as a separate corporation, and all of its assets, liabilities and items
of income, deduction and credit are treated as assets, liabilities and such
items of the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to
the REIT Corporation are: (i) rents from real property; (ii) interest on loans
secured by real property; (iii) gain from the sale of real property or loans
secured by real property (excluding gain from the sale of property held
primarily for sale to customers in the ordinary course of the REIT
Corporation's trade or business, referred to below as "dealer property"); (iv)
income from the operation and gain from the sale of certain property acquired
in connection with the foreclosure of a mortgage securing that property
("foreclosure property"); (v) distributions on, or gain from the sale of,
shares of other qualifying REITs; (vi) abatements and refunds of real property
taxes; and (vii) "qualified temporary investment income" (described below). In
evaluating the REIT Corporation's compliance with the 75% income test (as well
as the 95% income test described below), gross income does not include gross
income from "prohibited transactions." A prohibited transaction is one
involving a sale of dealer property, not including foreclosure property and
certain dealer property held by the REIT Corporation for at least four years.
The REIT Corporation expects that substantially all of its operating gross
income will be considered rent from real property. Rent from real property is
qualifying income for purposes of the 75% income test only if certain
conditions are satisfied. Rent from real property includes charges for
services customarily rendered to tenants, and rent attributable to personal
property leased together with the real property so long as the personal
property rent is less than 15% of the total rent. The REIT Corporation does
not expect to earn material amounts in these categories. Rent from real
property generally does not include rent based on the income or profits derived
from the property. The REIT Corporation does not intend to lease property and
receive rentals based on the tenant's net income or profit. However, rent
based on a percentage of gross income is permitted as rent from real property
and the REIT Corporation will have leases where rent is based on a percentage
of gross income. Also excluded is rent received from a person or corporation
in which the REIT Corporation (or any of its 10% or greater owners) directly or
indirectly through the constructive ownership rules contained in Section 318 of
the Code, owns a 10% or greater interest. USRP, through such attribution
rules, owns greater than a 10% interest in one tenant which leases three (3)
Burger King restaurant properties from the
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Operating Partnership. However, such non-qualifying income is less than 3.5%
of total gross income of the Operating Partnership. A third exclusion covers
amounts received with respect to real property if the REIT Corporation
furnishes services to the tenants or manages or operates the property, other
than through an "independent contractor" from whom the REIT Corporation does
not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if any services provided by the
REIT Corporation are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not considered rendered primarily
for the convenience of the tenant (applying standards that govern in
evaluating whether rent from real property would be unrelated business
taxable income when received by a tax exempt owner of the property).
The REIT Corporation will, in most instances, directly operate and manage
its assets without using an "independent contractor." The REIT Corporation
believes that the only material services to be provided to tenants will be
those usually or customarily rendered in connection with the rental of space
for occupancy only. The REIT Corporation will not provide services that might
be considered rendered primarily for the convenience of the tenants, such as
hotel, health care or extensive recreational or social services. Consequently,
the REIT Corporation believes that substantially all of its rental income will
be qualifying income under the 75% income test, and that the REIT Corporation's
provision of services will not cause the rental income to fail to be included
under that test.
Upon the REIT Corporation's ultimate sale of properties, any gains
realized also are expected to constitute qualifying income, as gain from the
sale of real property (not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of its gross income
from the sources listed above, at least an additional 20% of the REIT
Corporation's gross income for each taxable year must come either from those
sources, or from dividends, interest or gains from the sale or other
disposition of stock or other securities that do not constitute dealer
property. This test permits a REIT to earn a significant portion of its income
from traditional "passive" investment sources that are not necessarily real
estate related. The term "interest" (under both the 75% and 95% tests) does
not include amounts that are based on the income or profits of any person,
unless the computation is based only on a fixed percentage of receipts or
sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75%
and 95% tests, REITs generally are not permitted to earn more than 5% of their
gross income from active sources (such as brokerage commissions or other fees
for services rendered). This type of income will not qualify for the 75% test
or 95% test but is not expected to be significant and such income and other
nonqualifying income are expected to be at all times less than 5% of the REIT
Corporation's annual gross income. While the REIT Corporation does not
anticipate that it will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of the REIT Corporation's gross income, the
REIT Corporation could lose its status as a REIT. The REIT Corporation may
establish non-qualified REIT subsidiaries to hold assets generating
non-qualifying income. The gross income generated by these subsidiaries is not
included in the REIT Corporation's gross income. However, dividends from such
subsidiaries to the REIT
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Corporation are included in the REIT Corporation's gross income and qualify
for the 95% income test.
If the REIT Corporation fails to meet either the 75% or 95% income tests
during a taxable year, it may still qualify as a REIT for that year if (i) it
reports the source and nature of each item of its gross income in its Federal
income tax return for that year; (ii) the inclusion of any incorrect
information in its return is not due to fraud with intent to evade tax; and
(iii) the failure to meet the tests is due to reasonable cause and not to
willful neglect. However, in that case the REIT Corporation would be subject
to a 100% tax based on the greater of the amount by which it fails either the
75% or 95% income tests for such year. See "-- Taxation of the REIT
Corporation as a REIT."
30% INCOME TEST. The REIT Corporation also must earn less than 30% of its
gross income from the sale or other disposition of: (i) real property and
loans secured by real property held for less than four years (other than
foreclosure property and involuntarily conversions), (ii) stock or securities
held by the REIT Corporation for less than one year and (iii) property in a
prohibited transaction. The 30% income test does not have a reasonable cause
exception as do the 75% and 95% income tests. Consequently, a failure to meet
the 30% income test would terminate the REIT Corporation's status as a REIT
automatically. Because the REIT Corporation expects to hold its assets for
long-term investment and does not anticipate selling them within four years,
the REIT Corporation expects to comply with this requirement.
CHARACTER OF ASSETS OWNED. On the last day of each calendar quarter, the
REIT Corporation also must meet two tests concerning the nature of its
investments. First, at least 75% of the value of the total assets of the REIT
Corporation generally must consist of real estate assets, cash, cash items
(including receivables) and government securities. For this purpose, "real
estate assets" include interests in real property, interests in loans secured
by mortgages on real property or by certain interests in real property, shares
in other REITs and certain options, but exclude mineral, oil or gas royalty
interests. The temporary investment of new capital in debt instruments also
qualifies under this 75% asset test, but only for the one-year period beginning
on the date the REIT Corporation receives the new capital. Second, although
the balance of the REIT Corporation's assets generally may be invested without
restriction, the REIT Corporation will not be permitted to own (i) securities
of any one non-governmental issuer that represent more than 5% of the value of
the REIT Corporation's total assets or (ii) more than 10% of the outstanding
voting securities of any single issuer. A REIT, however, may own 100% of the
stock of a qualified REIT subsidiary, in which case the assets, liabilities and
items of income, deduction and credit of the subsidiary are treated as those of
the REIT. In evaluating a REIT's assets, if the REIT invests in a partnership,
it is deemed to own its proportionate share of the assets of the partnership.
The REIT Corporation anticipates that it will comply with these asset
tests. While some portion of its assets initially may be invested in
qualifying temporary debt investments, substantially all of the REIT
Corporation's investments will be in properties which should represent
qualifying real estate assets.
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ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain REIT status, the REIT
Corporation generally must distribute to its stockholders in each taxable year
at least 95% of its net ordinary income (capital gain is not required to be
distributed). More precisely, the REIT Corporation must distribute an amount
equal to (i) 95% of the sum of (a) its "REIT Taxable Income" before deduction
of dividends paid and excluding any net capital gain and (b) any net income
from foreclosure property less the tax on such income, minus (ii) certain
limited categories of "excess noncash income." REIT Taxable Income is defined
to be the taxable income of the REIT, computed as if it were an ordinary
corporation, with certain modifications. For example, the deduction for
dividends paid is allowed, but neither net income from foreclosure property,
nor net income from prohibited transactions, is included. In addition, the
REIT may carry over, but not carry back, a net operating loss for 15 years
following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during
the taxable year and with certain dividends paid after the end of the taxable
year. Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to stockholders of record on a date
during the last calendar quarter of that prior year are treated as paid on
December 31 of the prior year (for both the REIT Corporation and its
stockholders). Other dividends declared before the due date of the REIT
Corporation's tax return for the taxable year (including extensions) also will
be treated as paid in the prior year for the REIT Corporation if they are paid
(i) within 12 months of the end of such taxable year and (ii) no later than the
REIT Corporation's next regular distribution payment. Dividends that are paid
after the close of a taxable year and do not qualify under the rule governing
payments made in January that is described above will be taxable to the
shareholders in the year paid, even though they may be taken into account by
the REIT Corporation for a prior year. A nondeductible excise tax equal to 4%
will be imposed on the REIT Corporation for each calendar year to the extent
that dividends declared and distributed or deemed distributed before December
31 are less than the sum of (a) 85% of the REIT Corporation's "ordinary income"
plus (b) 95% of the REIT Corporation's capital gain net income plus (c) income
not distributed in earlier years minus (d) distributions in excess of income in
earlier years and (e) any amount of REIT taxable income for such year.
The REIT Corporation will be taxed at regular corporate rates to the
extent that it retains any portion of its taxable income (E.G., if the REIT
Corporation distributes only the required 95% of its taxable income, it would
be taxed on the retained 5%). Under certain circumstances the REIT Corporation
may not have sufficient cash or other liquid assets to meet the distribution
requirement. This could arise because of competing demands for the REIT
Corporation's funds, or due to timing differences between tax reporting and
cash receipts and disbursements (I.E., income may have to be reported before
cash is received, or expenses may have to be paid before a deduction is
allowed). Although the REIT Corporation does not anticipate any difficulty in
meeting this requirement, no assurance can be given that necessary funds will
be available.
If the REIT Corporation fails to meet the 95% distribution requirement
because of an adjustment to the REIT Corporation's taxable income by the IRS,
the REIT Corporation may be able to cure the failure retroactively by paying a
"deficiency dividend" (as well as applicable interest and penalties) within a
specified period.
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TAXATION OF THE REIT CORPORATION AS A REIT. The REIT Corporation will
adopt the calendar year for Federal income tax purposes, and will use the
accrual method of accounting. For each taxable year in which the REIT
Corporation qualifies as a REIT, it generally will be taxed only on the portion
of its taxable income that it retains (which will include undistributed net
capital gain), because the REIT Corporation will be entitled to a deduction for
its dividends paid to shareholders during the taxable year. A dividends paid
deduction is not available for dividends that are considered preferential
within any given class of shares or as between classes except to the extent
such class is entitled to such preference. The REIT Corporation does not
anticipate that it will pay any such preferential dividends. The Articles
provide for the automatic exchange of outstanding shares for Excess Stock in
circumstances in which the REIT Corporation's REIT status might otherwise be
put into jeopardy (I.E., if a person attempts to acquire a block of shares that
would be sufficient to cause the REIT Corporation to fail the requirement that
five or fewer individuals may not own more than 50% of the value of the
outstanding shares). Because Excess Stock will represent a separate class of
outstanding shares, the fact that those shares will not be entitled to
dividends should not adversely affect the REIT Corporation's ability to deduct
its dividend payments.
The REIT Corporation would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently 35%). A
confiscatory tax of 100% applies to any net income from prohibited
transactions. In addition, if the REIT Corporation fails to meet either the
75% or 95% source of income tests described above, but still qualifies for REIT
status under the reasonable cause exception to those tests, a 100% tax would be
imposed equal to the amount obtained by multiplying (i) the greater of the
amount, if any, by which it failed either the 75% income test or the 95% income
test, times (ii) the ratio of the REIT Corporation's REIT Taxable Income to the
REIT Corporation's gross income (excluding capital gain and certain other
items). The REIT Corporation also will be subject to the minimum tax on items
of tax preference (excluding items specifically allocable to the REIT
Corporation's stockholders). Finally, under regulations that are to be
promulgated, the REIT Corporation also may be taxed at the highest regular
corporate tax rate on any built-in gain (I.E., the excess of value over
adjusted tax basis) attributable to assets that the REIT Corporation acquires
in certain tax-free corporate transactions, to the extent the gain is
recognized during the first ten years after the REIT Corporation acquires such
assets.
FAILURE TO QUALIFY AS A REIT. For any taxable year in which the REIT
Corporation fails to qualify as a REIT, it would be taxed at the usual
corporate rates on all of its taxable income. Distributions to its
stockholders would not be deductible in computing that taxable income, and
distributions would no longer be required. Any corporate level taxes generally
would reduce the amount of cash available to the REIT Corporation for
distribution to its stockholders and, because the stockholders would continue
to be taxed on the distributions they receive, the net after tax yield to the
shareholders from their investment in the REIT Corporation likely would be
reduced substantially. As a result, the REIT Corporation's failure to qualify
as a REIT during any taxable year could have a material adverse effect upon the
REIT Corporation and its stockholders. If the REIT Corporation loses its REIT
status, unless certain relief provisions apply, the REIT Corporation will not
be eligible to elect REIT status again until the fifth taxable year which
begins after the first year for which the REIT Corporation's election was
terminated.
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If, after forfeiting its REIT status, the REIT Corporation later qualifies
and elects to be taxed as a REIT again, the REIT Corporation may face
significant adverse tax consequences. Prior to the end of the year in which
the REIT Corporation sought to qualify again as a REIT, the REIT Corporation
would be required to make distributions sufficient to eliminate any earnings
and profits accumulated during its period of non-REIT status. Moreover,
immediately prior to the effectiveness of the election to return to REIT
status, the REIT Corporation would be treated as having disposed of all of its
assets in a taxable transaction, triggering taxable gain with respect to the
REIT Corporation's appreciated assets. In that event, however, the REIT
Corporation would be permitted to elect an alternative treatment under which
those gains would be taken into account only as and when they actually are
recognized upon sales of the appreciated property occurring within a ten-year
period. The REIT Corporation would be required to distribute at least 95% of
any such recognized gains, but it would not receive the benefit of a dividends
paid deduction to reduce those taxable gains. Thus, any such gains on
appreciated assets would be subject to double taxation (I.E., at the corporate
level as well as the stockholder level).
TAXATION OF STOCKHOLDERS. Distributions generally will be taxable to
stockholders as ordinary income to the extent of the REIT Corporation's earning
and profits. Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year are
generally treated as if received by the stockholders on December 31 of the
calendar year during which they were declared. Distributions paid to
stockholders will not constitute passive activity income, and as a result
generally cannot be offset by losses from passive activities of a stockholder
who is subject to the passive activity rules. Distributions designated by the
REIT Corporation as capital gains dividends generally will be taxed as long
term capital gains to stockholders to the extent that the distributions do not
exceed the REIT Corporation's actual net capital gain for the taxable year.
Corporate stockholders may be required to treat up to 20% of any such capital
gains dividends as ordinary income. Distributions by the REIT Corporation,
whether characterized as ordinary income or as capital gains, are not eligible
for the 70% dividends received deduction for corporations. Stockholders are
not permitted to deduct losses or loss carry-forwards of the REIT Corporation.
Future regulations may require that the stockholders take into account, for
purposes of computing their individual alternative minimum tax liability,
certain tax preference items of the REIT Corporation.
The REIT Corporation may generate cash in excess of its net earnings. If
the REIT Corporation distributes cash to stockholders in excess of the REIT
Corporation's current and accumulated earnings and profits (other than as a
capital gain dividend), the excess cash will be deemed to be a return of
capital to each stockholder to the extent of the adjusted tax basis of the
shareholder's shares. Distributions in excess of the adjusted tax basis will
be treated as gain from the sale or exchange of the shares of stock. A
stockholder who has received a distribution in excess of current and
accumulated earnings and profits of the REIT Corporation may, upon the sale of
the shares, realize a higher taxable gain or a smaller loss because the basis
of the shares as reduced will be used for purposes of computing the amount of
the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of Common
Stock will be reportable as capital gain or loss. If a stockholder receives a
long-term capital gain dividend from the REIT Corporation and has held the
shares of stock for six months or less, any loss
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incurred on the sale or exchange of the shares is treated as a long-term
capital loss, to the extent of the corresponding long-term capital gain
dividend received.
In any year in which the REIT Corporation fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion
described above, except that no the REIT Corporation dividends will be eligible
for treatment as capital gains dividends, corporate stockholders will qualify
for the dividends received deduction and the stockholders will not be required
to report any share of the REIT Corporation's tax preference items.
BACKUP WITHHOLDING. The REIT Corporation will report to its stockholders
and the IRS the amount of dividends paid during each calendar year and the
amount of tax withheld, if any. If a stockholder is subject to backup
withholding, the REIT Corporation will be required to deduct and withhold from
any dividends payable to that stockholder a tax of 31%. These rules may apply
(i) when a stockholder fails to supply a correct taxpayer identification
number, (ii) when the IRS notifies the REIT Corporation that the stockholder is
subject to the rules or has furnished an incorrect taxpayer identification
number, or (iii) in the case of corporations or others within certain exempt
categories, when they fail to demonstrate that fact when required. A
stockholder that does not provide a correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount withheld as backup
withholding may be credited against the stockholder's federal income tax
liability. The REIT Corporation also may be required to withhold a portion of
capital gain distributions made to stockholders who fail to certify their
non-foreign status to the REIT Corporation.
TAXATION OF TAX EXEMPT ENTITIES. In general, a tax exempt entity that is
a stockholder of the REIT Corporation will not be subject to tax on
distributions from the REIT Corporation or gain realized on the sale of shares.
In Revenue Ruling 66-106, the IRS specifically confirmed that a REIT's
distributions to a tax exempt employees' pension trust did not constitute
unrelated business taxable income. A tax exempt entity may be subject to tax,
however, to the extent that it has financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code. The Revenue
Reconciliation Act of 1993 has modified the rules for tax exempt employees'
pension and profit sharing trusts which qualify under Section 401(a) of the
Code and are exempt from tax under Section 501(a) of the Code ("qualified
trusts") for tax years beginning after December 31, 1993. Under the new rules,
in determining the number of stockholders a REIT has for purposes of the "50%
test" described above under "--REIT Qualification--Share Ownership;
Reporting," generally, any stock held by a qualified trust will be treated as
held directly by its beneficiaries in proportion to their actuarial interests
in such trust and will not be treated as held by such trust. (This general
rule will not apply if certain persons related to the qualified trust
("disqualified persons") hold in the aggregate more than 5% of the value of the
REIT and the REIT has accumulated earnings and profits attributable to any
period for which it did not qualify as a REIT; this exception is not expected
to apply to the REIT Corporation.)
A qualified trust owning more than 10% of a REIT must treat a percentage
of dividends from the REIT as unrelated business taxable income. The
percentage is determined by dividing the REIT's gross income (less direct
expenses related thereto) derived from an unrelated trade or business for the
year by the gross income of the REIT for the year in which the dividends are
paid. However, if this percentage is less than 5%, dividends are not treated
as unrelated business
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taxable income. These unrelated business taxable income rules apply only if
the REIT qualifies as a REIT because of the change in the 50% test discussed
above and if the trust is "predominantly held" by qualified trusts. A REIT
is predominantly held by qualified trusts if at least one pension trust owns
more than 25% of the value of the REIT or a group of pension trusts
individually holding more than 10% of the value of the REIT collectively owns
more than 50% of the value of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt
from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20) of the Code, respectively, income from an investment in the REIT
Corporation will constitute unrelated business taxable income unless the
organization is able to deduct an amount properly set aside or placed in
reserve for certain purposes so as to offset the unrelated business taxable
income generated by the investment in the REIT Corporation. These prospective
investors should consult their own tax advisors concerning the "set aside" and
reserve requirements.
TAXATION OF FOREIGN INVESTORS. The rules governing federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex and no attempt will be made herein to provide more
than a summary of such rules. Prospective Non-U.S. Stockholders should consult
with their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares of Common Stock,
including any reporting requirements, as well as the tax treatment of such an
investment under the laws of their home country.
Dividends that are not attributable to gain from sales or exchanges by the
REIT Corporation of United States real property interests and not designated by
the REIT Corporation as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the REIT Corporation. Such dividends ordinarily will
be subject to a withholding tax equal to 30% of the gross amount of the
dividend unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a United
States trade or business, the Non-U.S. Stockholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. stockholders are taxed
with respect to such dividends (and may also be subject to the 30% branch
profits tax in the case of a stockholder that is a foreign corporation). The
REIT Corporation expects to withhold United States income tax at the rate of
30% on the gross amount of any such dividends paid to a Non-U.S. Stockholder
unless (i) the Non-U.S. Stockholder files on IRS Form 1001 claiming that a
lower treaty rate applies or (ii) the Non-U.S. Stockholder files an IRS Form
4224 with the REIT Corporation claiming that the dividend is effectively
connected income. Dividends in excess of current and accumulated earnings and
profits of the REIT Corporation will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such dividends exceed the adjusted basis of a Non-U.S. Stockholder's shares of
stock, they will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
shares, as described below. If it cannot be determined
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at the time a dividend is paid whether or not such dividend will be in excess
of current and accumulated earnings and profits, the dividends will be
subject to such withholding. The REIT Corporation does not intend to make
quarterly estimates of that portion of the dividends that are in excess of
earnings and profits, and as a result, all dividends will be subject to such
withholding. However, the Non-U.S. Stockholder may seek a refund of such
amounts from the IRS.
For any year in which the REIT Corporation qualifies as a REIT, dividends
that are attributable to gain from sales or exchanges by the REIT Corporation
of United States real property interests will be taxed to a Non-U.S.
Stockholder under the provisions of the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
business. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to U.S. stockholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, dividends subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder not entitled
to treaty exemption. The REIT Corporation is required by the Code and
applicable Treasury Regulations to withhold 35% of any dividend that could be
designated by the REIT Corporation as a capital gain dividend. This amount is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the REIT Corporation is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. It is currently anticipated that the REIT
Corporation will be a "domestically controlled REIT," and therefore the sale of
shares will not be subject to taxation under FIRPTA. Because the shares of
Common Stock will be publicly traded, however, no assurance can be given that
the REIT Corporation will remain a "domestically controlled REIT." However,
gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the shares of Common Stock is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain (and may also be subject to the 30% branch profits
tax in the case of a stockholder that is a foreign corporation), or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the
sale of shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals
and may also be subject to the 30% branch profits tax in the case of a
stockholder that is a foreign corporation).
Upon the death of a foreign individual stockholder, the investor's shares
will be treated as part of the investor's U.S. estate for purposes of the U.S.
estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
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STATE AND LOCAL TAXES. The REIT Corporation and its stockholders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they transact business or reside. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the REIT Corporation.
B. THE EXCHANGE ALTERNATIVE
Except for the Ruling requested in connection with the Merger Alternative
as described elsewhere in this Proxy Statement/Prospectus, no rulings have
been, or will be, obtained from the IRS concerning the matters set forth in
this section. If the Conversion is effected pursuant to the Exchange
Alternative, no gain or loss should be recognized by the Unitholders as a
result of the amendments to the Partnership Agreements and the admission of the
REIT Corporation as a partner in the Operating Partnership. A Unitholder's
eventual exchange of Units for shares of Common Stock will be a taxable event.
See "--The Exchange Alternative--Disposition of Units: Exchange for Shares in
the REIT Corporation." Prior to such exchange, the Unitholders generally will
continue to be taxed in the same manner as they were taxed preceding the
admission of the REIT Corporation as a limited partner of the Operating
Partnership, summarized as follows:
1. PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Each partner is required to take into account in computing his
federal income tax liability his allocable share of income, gains, losses,
deductions and credits of the partnership, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the distribution is in excess of the partner's tax
basis in his partnership interest.
Section 7704 of the Code provides that publicly-traded partnerships shall,
as a general rule, be taxed as corporations despite the fact that they are not
classified as associations taxable as corporations under Section 7701. USRP
probably will continue to be a "publicly traded partnership" for purposes of
Section 7704 of the Code after the Units are no longer listed on the NYSE.
Section 7704 of the Code provides an exception to this general rule (the "Real
Property Rent Exception") for a publicly traded partnership if 90% or more of
its gross income for every taxable year consists of "qualifying income."
"Qualifying income" includes real property rental income and gain from the sale
or other disposition of real property and gains from the sale or other
disposition of capital assets held for the production of income that otherwise
constitutes "qualifying income."
Real property rent is defined, under Section 7704 of the Code, as amounts
which would qualify as rent from real property under Section 856(d) of the Code
(the provisions of the Code dealing with REITs). Although substantially all of
the income of USRP consists of qualifying rental income, USRP currently engages
in activities that give rise to non-qualifying rental income and may enter into
other such transactions in the future. Rental income of USRP may not qualify
as real property rent pursuant to Section 856 of the Code if USRP, directly or
indirectly through the constructive ownership rules contained in Section 318 of
the Code, owns more than 10% of
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the capital or profits interest in any tenant leasing real property from
USRP. USRP, through such attribution rules, owns greater than a 10% interest
in one tenant which leases three (3) Burger King restaurant properties from
the Operating Partnership. However, such non-qualifying income is less than
3.5% of total gross income. With respect to other transactions in which the
Managing General Partner has or may acquire an ownership interest in any
tenant, the Managing General Partner has represented that it and its
affiliates will not acquire, or allow any Unitholder owning more than 5% of
total Units outstanding to acquire, greater than a 10% ownership interest in
such tenant.
Additionally, USRP has purchased items of personalty and equipment and
leased such items to tenants in conjunction with real property leases. To the
extent that the rental income attributable to such equipment exceeds 15% of
total rental income for the real property and equipment, such rental income
would not qualify as real property rent. USRP generally separately allocates
rental income between equipment and real property, and the equipment component
of such rental income is generally less than 15% of the total rental income.
Assuming that such allocation is valid, no portion of the rental income
attributable to equipment and personal property should constitute
non-qualifying income.
USRP estimates that a total of 3.5% of its gross income for taxable year
1997 will not constitute qualifying income, and estimates that less than 3.5%
of its gross income for each subsequent taxable year will not constitute
qualifying income.
Winstead Sechrest & Minick P.C. is of the opinion that under current law,
and subject to the conditions and qualifications set forth below, each of USRP
and the Operation of Partnership will be treated as a partnership for federal
income tax purposes. However, such opinion is not binding on the IRS.
In rendering its opinion that neither Partnership will be treated as a
corporation for federal income tax purposes, counsel has relied on the
following factual representations by the Managing General Partner as to the
Partnerships:
1. Each Partnership will be operated in accordance with applicable
state partnership statutes, its partnership agreement and the statements
and representations made in this Proxy Statement/Prospectus.
2. For each taxable year, less than 10% of each Partnership's gross
income will be derived from sources other than (i) real property rental
income and gain from the sale or other disposition of real property, or
(ii) other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
If USRP fails to meet the Real Property Rent Exception to the general rule
of Section 7704 of the Code (other than a failure determined by the IRS to be
inadvertent which is cured within a reasonable time after discovery), USRP will
be treated as if it had transferred all of its assets (subject to liabilities)
to a newly-formed corporation (on the first day of the year in which it fails
to meet the Real Property Rent Exception) in return for stock in such
corporation, and then distributed such stock to the Unitholders in liquidation
of their interest in USRP.
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If either Partnership were taxable as a corporation or treated as an
association taxable as a corporation in any taxable year, its income, gains,
losses, deductions and credits would be reflected only on its tax return rather
than being passed through to its partners and its taxable income would be taxed
at corporate rates. In addition, its distributions to each of its partners
would be treated as either dividend income (to the extent of its current or
accumulated earnings and profits), and, in the absence of earnings and profits,
as a nontaxable return of capital (to the extent of such partner's tax basis in
his interest therein) or taxable capital gain (after such partner's tax basis
in his interest therein is reduced to zero). Furthermore, losses realized by
such Partnership would not flow through to the Unitholders. Accordingly,
treatment of either Partnership as a corporation for federal income tax
purposes would probably result in a material reduction in a Unitholder's cash
flow and after-tax return. In addition, if USRP were to fail to qualify as a
partnership for federal income tax purposes, the REIT Corporation could fail to
qualify as a REIT.
The discussion below is based on the assumption that each Partnership will
be classified as a partnership for federal income tax purposes. If that
assumption proves to be erroneous, most, if not all, of the tax consequences
described below would not be applicable to Unitholders.
2. PARTNER STATUS
Unitholders who have become limited partners of USRP pursuant to the
provisions of the Master Partnership Agreement will be treated as partners of
USRP for federal income tax purposes.
The IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of such ruling, except as otherwise described herein, (i) assignees who
have executed and delivered transfer applications, and are awaiting admission
as limited partners of the Partnership, and (ii) Unitholders whose Units are
held in street name or by another nominee will be treated as partners for
federal income tax purposes. As such ruling does not extend, on its facts, to
assignees of Units who are entitled to execute and deliver transfer
applications and thereby become entitled to direct the exercise of attendant
rights, but who fail to execute and deliver transfer applications, the tax
status of such Unitholders is unclear. Such Unitholders should consult their
own tax advisors with respect to their status as partners in USRP for federal
income tax purposes. A purchaser or other transferee of Units who does not
execute and deliver a transfer application may not receive certain federal
income tax information or reports furnished to record holders of Units unless
the Units are held in a nominee or street name account and the nominee or
broker has executed and delivered a transfer application with respect to such
Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such Units for federal income tax purposes. See "--The
Exchange Alternative--Treatment of Short Sales."
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3. TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. USRP's income, gains, losses, deductions
and credits will consist of its allocable share of the income, gains, losses,
deductions and credits of the Operating Partnership and dividends from its
corporate subsidiaries. Because USRP is not a taxable entity and incurs no
federal income tax liability, each Unitholder will be required to take into
account his allocable share of income, gain, loss and deductions of the
Operating Partnership (through USRP) without regard to whether corresponding
cash distributions are received by Unitholders. Consequently, a Unitholder may
be allocated income from USRP although he has not received a cash distribution
in respect of such income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Under Section 731 of the Code,
distributions by USRP to a Unitholder generally will not be taxable to such
Unitholder for federal income tax purposes to the extent of his tax basis in
his Units immediately before the distribution. Cash distributions (and, in
certain circumstances, distributions of marketable securities) in excess of
such basis generally will be considered to be gain from the sale or exchange of
the Units, taxable in accordance with the rules described under "--The Exchange
Alternative--Disposition of Units." The right to exchange Units for Common
Stock of the REIT Corporation may be treated as a marketable security, in which
event the distribution of such rights to the Unitholders would be treated as if
the Unitholders received cash equal to the fair market value of such rights
received. Any reduction in a Unitholder's share of USRP's liabilities included
in his tax basis in his Units will be treated as a distribution of cash to such
Unitholder. See "--The Exchange Alternative--Tax Basis of Units." A decrease
in a Unitholder's percentage interest in USRP because of a partnership offering
of additional Units such as upon the admission of the REIT Corporation, will
decrease such Unitholder's share of nonrecourse liabilities and, thus, will
result in a corresponding deemed distribution of cash.
A non-pro rata distribution of money or property may result in ordinary
income to a Unitholder, regardless of his tax basis in his Units, if such
distribution reduces the Unitholder's share of USRP's "unrealized receivables"
(including depreciation recapture) and/or substantially appreciated "inventory
items" (both as defined in Section 751 of the Code) (collectively, "Section 751
Assets"). To that extent, the Unitholder will be treated as having received
his proportionate share of the Section 751 Assets and having exchanged such
assets with USRP in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the Unitholder's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (i) the non-pro rata portion of
such distribution over (ii) the Unitholder's tax basis for the share of such
Section 751 Assets deemed relinquished in the exchange.
TAX BASIS OF UNITS. In general, a Unitholder's tax basis for his Units
initially will be equal to the price of such Units to him. A Unitholder's tax
basis will generally be increased by (i) his share of partnership taxable
income and (ii) his share of partnership liabilities that are without recourse
to any partner ("nonrecourse liabilities"), if any. Generally, a Unitholder's
tax basis in his interest will be decreased (but not below zero) by (a) his
share of partnership distributions, (b) his share of decreases in nonrecourse
liabilities of the partnership, (c) his share of losses of the partnership, and
(d) his share of nondeductible expenditures of the partnership
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that are not chargeable to capital. A Unitholder's share of nonrecourse
liabilities will generally be based on his share of the partnership's
profits. Accordingly, at the time that a Unitholder makes the adjustment to
his share of partnership properties pursuant to Section 743(b) of the Code,
the Unitholder will not be permitted to include the recourse debt financing
of the partnership but may be entitled to include a portion of the
partnership's nonrecourse financing, in such adjustment. See "--The Exchange
Alternative--Tax Treatment of Operations--Section 754 Election."
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The passive loss limitations
contained in Section 469 of the Code generally provide that individuals,
estates, trusts and certain closely-held corporations and personal service
corporations can deduct losses from passive activities (generally, activities
in which the taxpayer does not materially participate) only to the extent of
the taxpayer's income from such passive activities or investments. The passive
loss limitations are to be applied separately with respect to publicly-traded
partnerships. Consequently, losses generated by USRP, if any, will be
available to offset only future income generated by USRP and will not be
available to offset income from other passive activities or investments
(including other publicly traded partnerships) or salary or active business
income. Passive losses that are not deductible because they exceed the
Unitholder's income generated by USRP may be deducted in full when the
Unitholder disposes of his entire investment in USRP to an unrelated party in a
fully taxable transaction.
A Unitholder's share of net income from USRP may be offset by any
suspended passive losses from USRP, but may not be offset by any other current
or carryover losses from other passive activities, including those attributable
to other publicly traded partnerships. According to an IRS announcement,
Regulations will be issued which characterize net passive income from a
publicly traded partnership as investment income for purposes of deducting
investment interest.
In addition to the foregoing limitations, a Unitholder may not deduct from
taxable income his share of partnership losses, if any, to the extent that such
losses exceed the lesser of (i) the tax basis of his Units at the end of the
partnership's taxable year in which the loss occurs and (ii) the amount for
which the Unitholder is considered "at risk" under Section 465 of the Code at
the end of that year. In general, a Unitholder will initially be "at risk" to
the extent of the purchase price of his Units. A Unitholder's "at risk" amount
increases or decreases as his tax basis in his Units increases or decreases,
except that nonrecourse liabilities (or increases or decreases in such
liabilities) of USRP generally do not affect his "at risk" amount. Losses
disallowed to a Unitholder as a result of these rules can be carried forward
and will be allowable to the Unitholder to the extent that his tax basis or "at
risk" amount (whichever was the limiting factor) is increased in a subsequent
year. The "at risk" rules apply to an individual Unitholder, a shareholder of
a corporate Unitholder that is an S corporation and a corporate Unitholder if
50% or more of the value of such stock is owned directly or indirectly by five
or fewer individuals.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION. The Master
Partnership Agreement requires that a capital account be maintained for each
partner in accordance with the tax accounting principles set forth in
applicable Treasury Regulations under Section 704 of the Code. Distributions
upon liquidation of USRP are to be made in accordance with positive capital
account balances.
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In general, if USRP has a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the Unitholders in
accordance with their respective interests in USRP. Notwithstanding the above,
as required by Section 704(c) of the Code, certain items of partnership income,
gain, loss and deduction will be allocated to account for the difference
between the tax basis and fair market value of certain property held by USRP
("Contributed Property"). Transactions which result in a required Section
704(c) allocation with respect to Contributed Property may arise if (i) a
Unitholder contributes appreciated or depreciated property, rather than cash,
to USRP, or (ii) additional Units are issued for cash, and at the time of such
issuance, the capital account of the existing partners are restated to account
for the difference between the tax basis and fair market value of partnership
property. USRP has previously participated in several transactions described
in clause (i) above. Upon the admission of the REIT Corporation, the capital
accounts of the existing partners will be restated as described in clause (ii)
above. Accordingly, with respect to each such transaction, USRP will be
required to make Section 704(c) allocations.
In addition, certain items of recapture income will be allocated to the
extent possible to the partner allocated the deduction giving rise to the
treatment of such gain as recapture income in order to minimize the recognition
of ordinary income by some Unitholders, but these allocations may not be
respected. If these allocations of recapture income are not respected, the
amount of the income or gain allocated to a Unitholder will not change, but a
change in the character of the income allocated to a Unitholder would result.
Finally, although USRP does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts
nevertheless result, items of partnership income and gain will be allocated in
an amount and manner sufficient to eliminate the negative balances as quickly
as possible.
Under Section 704(c) of the Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount of any such
item recognized by that partnership in a particular taxable period (the
"ceiling limitation"). To the extent the ceiling limitation is or becomes
applicable, the Partnership Agreements will require that certain items of
income and deduction be allocated in a way designed to effectively "cure" this
problem and eliminate the impact of the ceiling limitation. Such allocations
will not have substantial economic effect because they will not be reflected in
the capital accounts of the Unitholders. Regulations under Section 704(c) of
the Code permit a partnership to make reasonable curative allocations to reduce
or eliminate disparities between the tax basis and value attributable to
Contributed Properties.
Counsel is of the opinion that, allocations under the Master Partnership
Agreement will be given substantial effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction. There are, however, uncertainties in the Regulations relating to
allocations of partnership income.
4. TAX TREATMENT OF OPERATIONS.
INCOME AND DEDUCTIONS IN GENERAL. No federal income tax will be paid by
USRP. Instead, each Unitholder will be required to report on his income tax
return his allocable share of income, gains, losses and deductions of USRP.
Such items must be included on the Unitholder's federal income tax return
without regard to whether USRP makes a distribution of
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cash to the Unitholder. A Unitholder is generally entitled to offset his
allocable share of USRP's passive income with his allocable share of losses
generated by USRP, if any. See "--The Exchange Alternative--Tax Consequences
of Unit Ownership--Limitations on Deductibility of Losses."
USRP has adopted a convention with respect to transferring Unitholders
which generally allocates the net income or net loss of USRP proportionately to
each day of the year, and treats any Unitholder owning a Unit as of the last
day of the month as owning the Unit for the entire month.
ACCOUNTING METHOD AND TAXABLE YEAR. USRP utilizes the calendar year as
its taxable year and adopted the accrual method of accounting for federal
income tax purposes.
DEPRECIATION METHOD. USRP elected to use the straight-line depreciation
method with respect to its real property assets. Property subsequently
acquired or constructed by USRP may be depreciated using accelerated
depreciation methods permitted by Section 168 of the Code.
SECTION 754 ELECTION. Each Partnership has made the election permitted by
Section 754 of the Code effective for Partnership taxable year 1996. Such
election generally permits a purchaser of Units to adjust his share of the tax
basis in USRP's properties pursuant to Section 743(b) of the Code. Such
elections are irrevocable without the consent of the IRS. The Section 743(b)
adjustment is attributed solely to a purchaser of Units and is not added to the
tax basis of USRP's assets associated with all of the Unitholders (the "Common
Bases"). The amount of the adjustment under Section 743(b) is the difference
between the Unitholder's tax basis in his Units and the Unitholder's
proportionate share of the Common Bases attributable to the Units pursuant to
Section 743. The aggregate amount of the adjustment computed under Section
743(b) is then allocated among the various assets of USRP pursuant to the rules
of Section 755. The Section 743(b) adjustment acts in concert with the Section
704(c) allocations (including the curative allocations, if respected) in
providing the purchaser of Units with the equivalent of a tax basis in his
share of USRP's properties equal to the fair market value of such share. See
"--The Exchange Alternative--Tax Consequences of Unit Ownership--Allocation of
Partnership Income, Gain, Loss and Deduction" and "--The Exchange Alternative--
Uniformity of Units."
Proposed Regulation Section 1.168-2(n) generally requires the Section
743(b) adjustment attributable to recovery property to be depreciated as if the
total amount of such adjustment were attributable to newly-acquired recovery
property placed in service when the transfer occurs. The legislative history
of Section 197 of the Code indicates that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible should be similarly
treated. Under Regulation Section 1.167(c)-l(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
of the Code rather than cost recovery deductions under Section 168 is generally
required to be depreciated using either the straight-line method or the 150%
declining balance method. USRP utilizes the straight line method on such
property. The depreciation and amortization methods and useful lives
associated with the Section 743(b) adjustment, therefore, may differ from the
methods and useful lives generally used to depreciate the Common Bases in such
properties. The managing general partner of USRP is authorized to adopt a
convention to preserve the uniformity of Units despite its inconsistency with
Proposed
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Regulation Section 1.168-2(n) and Regulation Section 1.167(c)-l(a)(6). See
"--The Exchange Alternative--Uniformity of Units."
USRP intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property
(to the extent of any unamortized disparity between the tax basis and value
attributable to Contributed Property) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Bases of such property, despite its inconsistency
with Proposed Regulation Section 1.168-2(n), Regulation Section
1.167(c)-l(a)(6) or the legislative history of Section 197 of the Code. If
USRP determines that such position cannot reasonably be taken, USRP may adopt a
depreciation or amortization convention under which all purchasers acquiring
Units in the same month would receive depreciation or amortization, whether
attributable to Common Bases or Section 743(b) basis, based upon the same
applicable rate as if they had purchased a direct interest in USRP's property.
Such an aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to certain
Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles,
the IRS may seek to reallocate some or all of any Section 743(b) adjustment not
so allocated by USRP to goodwill which, as an intangible asset, would be
amortizable over a longer period of time than certain of USRP's tangible
assets.
A Section 754 election is advantageous when the transferee's tax basis in
such Units is higher than such Units' share of the aggregate tax basis in
USRP's assets immediately prior to the transfer. In such case, pursuant to the
election, the transferee will take a new and higher tax basis in his share of
USRP's assets for purposes of calculating, among other items, his depreciation
deductions and his share of any gain or loss on a sale of USRP's assets.
Conversely, a Section 754 election would be disadvantageous if the transferee's
tax basis in such Units is lower than such Units' share of the aggregate tax
basis in USRP's assets immediately prior to the transfer. Thus, the amounts
that a Unitholder would be able to obtain on a sale or other disposition of his
Units may be affected favorably or adversely by the elections under Section
754.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF PROPERTIES. The
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the managing general partner of the relative fair
market values and determinations of the tax basis of the assets of USRP. The
federal income tax consequences of such estimates and determinations of tax
basis may be subject to challenge and will not be binding on the IRS or the
courts. If the estimates of fair market value or determinations of tax basis
were found to be incorrect, the character and amount of items of income, gain,
loss, deduction or credit previously reported by Unitholders might change, and
Unitholders might be required to amend their previously filed tax returns or to
file claims for refund.
5. ALTERNATIVE MINIMUM TAX
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Each Unitholder will be required to take into account his share of any
items of partnership income, gain or loss for purposes of the alternative
minimum tax. A portion of USRP's depreciation deductions may be treated as an
item of tax preference for this purpose. A Unitholder's alternative minimum
taxable income derived from USRP may be higher than his share of partnership
net income because USRP may use more accelerated methods of depreciation for
purposes of computing federal taxable income or loss.
6. TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES
AND FOREIGN INVESTORS
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income ("UBIT"). Substantially all of the income of USRP is rental
income from real property which is excluded from the definition of UBIT.
However, to the extent that any rental income is attributable to debt-financed
property, as defined in Section 514 of the Code, such income will not satisfy
the rental income exclusion and will be taxable to a tax-exempt Unitholder as
an item of UBIT. Although USRP currently has only a small amount of
debt-financed property (as defined under Section 514 of the Code), the Managing
General Partner expects such proportion of debt-financed properties to increase
as USRP continues its acquisition program. Accordingly, a larger percentage of
USRP's total income may become UBIT.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of USRP's gross income will be
qualifying income.
Nonresident aliens and foreign corporations, trusts or estates that own
Units are considered to be engaged in business in the United States on account
of ownership of such Units and as a consequence are required to file federal
tax returns in respect of their distributive shares of partnership income,
gain, loss, deduction or credit and pay federal income tax at regular rates
(net of credits, including withholding) on such income. Generally, a
partnership is required by Section 1446 of the Code to pay a withholding tax on
the portion of the partnership's income that is effectively connected with the
conduct of a United States trade or business and that is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, USRP will withhold (currently at the rate of 39.6%) on actual
cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the transfer agent of USRP on a Form W-8 in order to obtain
credit for the taxes withheld. Subsequent adoption of Regulations or the
issuance of other administrative pronouncements may require USRP to change
these procedures.
Because a foreign corporation that owns Units is treated as engaged in a
United States trade or business, such a Unitholder is subject to United States
branch profits tax at a rate of 30%, in addition to regular federal income tax,
on its allocable share of USRP's earnings and profits (as adjusted for changes
in the foreign corporation's "U.S. net equity") that are effectively
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connected with the conduct of a United States trade or business. Such a tax
may be reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate Unitholder
is a "qualified resident." In addition, such a Unitholder is subject to
special information reporting requirements under Section 6038C of the Code.
A foreign Unitholder who sells or otherwise disposes of a Unit will be
subject to federal income tax on gain realized on the disposition of such Unit
to the extent that such gain is effectively connected with a United States
trade or business of the foreign Unitholder. The IRS has issued a ruling under
which all or a portion of any gain that is recognized on a sale of a Unit by a
foreign Unitholder will be subject to tax under the rule of the preceding
sentence. USRP does not expect that any material portion of any such gain will
avoid United States taxation. If less than all of any such gain is so taxable,
then Section 897 of the Code may increase the portion of any gain that is
recognized by a foreign Unitholder that is subject to United States income tax
and withholding of 10% of the amount realized on the disposition of a Unit may
apply if that foreign Unitholder has held more than 5% in value of the Units
during the five-year period ending on the date of the disposition or if the
Units are not regularly traded on an established securities market at the time
of the disposition.
7. UNIFORMITY OF UNITS
There can arise a lack of uniformity in the intrinsic tax characteristics
of Units sold after the date hereof and Units outstanding as of the date
hereof. Without such uniformity, compliance with several federal income tax
requirements, both statutory and regulatory, could be substantially diminished.
In addition, such non-uniformity could have a negative impact on the ability of
a Unitholder to dispose of his interest in USRP. Such lack of uniformity can
result from the application of Proposed Regulation Section 1.168-2(n) and
Regulation Section 1.167(c)-l(a)(6) or the application of certain "ceiling"
limitations on USRP's ability to make allocations to eliminate disparities
between the tax basis and value attributable to partnership properties.
Depreciation conventions may be adopted or items of income and deduction
may be specially allocated in a manner that is intended to preserve the
uniformity of intrinsic tax characteristics among all Units, despite the
application of either Proposed Regulation Section 1.168-2(n) and Regulation
Section 1.167(c)-l(a)(6) or the "ceiling" limitations to partnership
properties. Any such special allocation will be made solely for federal income
tax purposes. In the event the IRS disallows the use of such conventions, some
or all of the adverse consequences described in the preceding paragraph could
result. See "--The Exchange Alternative--Allocation of Partnership Income,
Gain, Loss and Deduction" and "--The Exchange Alternative--Tax Treatment of
Operations--Section 754 Election."
8. DISPOSITION OF UNITS: EXCHANGE FOR SHARES IN THE REIT CORPORATION
GAIN OR LOSS IN GENERAL. If a Unit is transferred to the REIT Corporation
in exchange for shares in the REIT Corporation, or is sold or otherwise
disposed of, the determination of gain or loss from the exchange, sale or other
disposition will be based on the difference between the amount realized and the
tax basis for such Unit. See "--The Exchange Alternative--Tax Consequences of
Unit Ownership--Basis of Units." Upon the exchange, sale or other disposition
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of Units, a Unitholder's "amount realized" will be measured by the sum of the
cash or fair market value of other property received plus the portion of USRP's
nonrecourse liabilities allocated to the Units sold. Similarly, upon a gift of
his Units, a Unitholder will be deemed to have realized gain with respect to
the portion of USRP's nonrecourse liabilities allocable to such Units. To the
extent that the amount of cash or property received plus the allocable share of
USRP's nonrecourse liabilities exceeds the Unitholder's tax basis for the Units
disposed of (in the case of a charitable gift, only a portion of such tax basis
may be offset against the nonrecourse debt), the Unitholder will recognize
gain. The tax liability resulting from such gain could exceed the amount of
cash received upon the disposition of such Units.
The IRS has ruled that a partner must maintain an aggregate tax basis for
his interests in a single partnership (consisting of all interests acquired in
separate transactions). On a sale of a portion of such aggregate interest,
such partner would be required to allocate his aggregate tax basis between the
interest sold and the interest retained by some equitable apportionment method.
If applicable, the aggregation of tax basis of a Unitholder effectively
prohibits a Unitholder from choosing among Units with varying amounts of
inherent gain or loss to control the timing of the recognition of such inherent
gain or loss as would be possible in a stock transaction. Thus, the IRS ruling
may result in an acceleration of gain or deferral of loss on a sale of a
portion of a Unitholder's Units. It is not clear whether such ruling applies
to publicly traded partnerships, such as USRP, the interests in which are
evidenced by separate registered certificates, providing a verifiable means of
identifying each separate interest and tracing the purchase price of such
interest. A Unitholder considering the purchase of additional Units or a sale
of Units purchased at differing prices should consult his tax advisor as to the
possible consequences of that IRS ruling.
To the extent that a portion of the gain upon the sale of a Unit is
attributable to a Unitholder's share of "substantially appreciated inventory
items" and "unrealized receivables" of USRP, as those terms are defined in
Section 751 of the Code, such portion will be treated as ordinary income.
Unrealized receivables include (i) to the extent not previously includable in
partnership income, any rights to pay for services rendered or to be rendered
and (ii) amounts that would be subject to recapture as ordinary income if USRP
had sold its assets at their fair market value at the time of the transfer of a
Unit.
Gain from the sale or other disposition of a Unit may constitute
investment income under Section 163(d) of the Code. A Unitholder must report
to the transfer agent of USRP (on behalf of USRP) any transfer of Units. See
"--The Exchange Alternative--Information Return Filing Requirements."
The treatment of distributions received after a Unitholder has disposed of
his Units is unclear. Such a distribution may be fully taxable as ordinary
income or may reduce a Unitholder's tax basis for the Units disposed of,
resulting in a larger gain or smaller loss from such disposition.
TRANSFEROR/TRANSFEREE ALLOCATIONS. In general, USRP's taxable income and
losses are determined annually and are prorated on a monthly basis and
subsequently apportioned among the Unitholders in proportion to the number of
Units owned by them. However, extraordinary
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gain or loss realized on a Terminating Capital Transaction is allocated among
the Unitholders of record as of the date such Terminating Capital Transaction
occurs. As a result of this monthly allocation, a Unitholder transferring
Units may be allocated income, gain, loss, deduction and credit accrued after
the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Regulations and, accordingly, counsel is unable to opine on the
validity of the method of allocating income and deductions between the
transferors and transferees of Units. If the IRS treats transfers of Units as
occurring throughout each month and a monthly convention is not allowed by the
regulations (or only applies to transfers of less than all of a partner's
interest), the IRS may contend that taxable income or losses of USRP must be
reallocated among its partners. If any such contention were sustained, certain
Unitholders' respective tax liabilities would be adjusted to the possible
detriment of other Unitholders. The managing general partner is authorized to
revise USRP's method of allocation between transferors and transferees (as well
as among partners whose interests otherwise vary during a taxable period) to
comply with any future regulations.
9. CONSTRUCTIVE TERMINATION OR DISSOLUTION OF PARTNERSHIP
Under Section 708(b)(1)(B) of the Code, a partnership will be considered
to have been terminated if within a twelve-month period there is a sale or
exchange of 50% or more of the interests in partnership capital and profits. A
termination results in a closing of the partnership's taxable year for all
partners, and the partnership's assets are treated as having been distributed
to the partners and reconveyed to the partnership, which is then treated as a
new partnership. A constructive termination of USRP will cause a termination
of the Operating Partnership. In the case of a Unitholder reporting on a
fiscal year other than a calendar year, the closing of a tax year of USRP may
result in more than twelve months' taxable income or loss of USRP being
includable in his taxable income for the year of termination. In addition,
each Unitholder will realize taxable gain to the extent that any money
distributed or deemed distributed to him (including any net reduction in his
share of USRP's nonrecourse liabilities) exceeds the tax basis of his Units.
A termination of either Partnership under Section 708(b)(1)(B) could
result in adverse tax consequences to Unitholders because it could result in a
change in the tax basis for USRP's properties and would require that new tax
elections be made by the reconstituted partnerships. In addition, such a
termination could result in a deferral of partnership depreciation deductions.
Further, such a termination may either accelerate the application of (or
subject the reconstituted partnerships to the application of) any change in law
effective as of a date after the termination.
USRP may not have the ability to determine when a constructive termination
occurs as a result of transfers of Units because the Units are currently freely
transferable under "street name" ownership. Thus, USRP may be subject to
penalty for failure to file a tax return and may fail to make certain
partnership elections in a timely manner, including the Section 754 Election.
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<PAGE>
10. PARTNERSHIP INCOME TAX INFORMATION RETURNS AND
PARTNERSHIP AUDIT PROCEDURES
USRP will use all reasonable efforts to furnish Unitholders with tax
information within 75 days after the close of each partnership taxable year.
Specifically, USRP intends to furnish to each Unitholder a Schedule K-1 which
sets forth his allocable share of USRP's income, gains, losses, deductions and
credits, if any. In preparing such information, the managing general partner
will necessarily use various accounting and reporting conventions to determine
each Unitholder's allocable share of income, gains, losses, deductions and
credits. There is no assurance that any such conventions will yield a result
that conforms to the requirements of the Code, the Regulations or the
administrative pronouncements of the IRS. The managing general partner cannot
assure Unitholders that the IRS will not contend that such accounting and
reporting conventions are impermissible. Contesting any such allegations could
result in substantial expense to USRP. In addition, if the IRS were to
prevail, Unitholders may incur substantial liabilities for taxes and interest.
The federal income tax information returns filed by USRP may be audited by
the IRS. The Code contains partnership audit procedures that significantly
simplify the manner in which IRS audit adjustments of partnership items are
resolved. Adjustments (if any) resulting from such an audit may require each
Unitholder to file an amended tax return, and possibly may result in an audit
of the Unitholder's return. Any audit of a Unitholder's return could result in
adjustments of non-partnership as well as partnership items.
Under Sections 6221 through 6233 of the Code, partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial
review of administrative adjustments by the IRS and tax settlement proceedings.
The tax treatment of partnership items of income, gain, loss, deduction and
credit is determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the partners. The Code
provides for one partner to be designated as the "Tax Matters Partner" for
these purposes. The Master Partnership Agreement appoints the managing general
partner as the Tax Matters Partner for USRP.
The Tax Matters Partner is entitled to make certain elections on behalf of
USRP and Unitholders and can extend the statute of limitations for assessment
of tax deficiencies against Unitholders with respect to partnership items. In
connection with adjustments to partnership tax returns proposed by the IRS, the
Tax Matters Partner may bind any Unitholder with less than a 1% profits
interest in USRP to a settlement with the IRS unless the Unitholder elects, by
filing a statement with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (to which all the
Unitholders are bound) of a final partnership administrative adjustment and, if
the Tax Matters Partner fails to seek judicial review, such review may be
sought by any Unitholder having at least a 1% profit interest in USRP and by
Unitholders having, in the aggregate, at least a 5% profits interest. Only one
judicial proceeding will go forward, however, and each Unitholder with an
interest in the outcome may participate.
The Unitholders will generally be required to treat partnership items on
their federal income tax returns in a manner consistent with the treatment of
the items on the USRP information return. In general, that consistency
requirement is waived if the Unitholder files a
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<PAGE>
statement with the IRS identifying the inconsistency. Failure to satisfy the
consistency requirement, if not waived, will result in an adjustment to
conform the treatment of the item by the Unitholder to the treatment on USRP
return. Even if the consistency requirement is waived, adjustments to the
Unitholder's tax liability with respect to partnership items may result from
an audit of USRP's or the Unitholder's tax return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties.
11. INFORMATION RETURN FILING REQUIREMENTS
A Unitholder who sells or exchanges Units is required by Section 6050K of
the Code to notify USRP in writing of such sale or exchange, and USRP is
required to notify the IRS of such transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker. In
addition, a transferor and a transferee of a Unit will be required to furnish
to the IRS the amount of the consideration received for such Unit that is
allocated to goodwill or going concern value of USRP. Failure to satisfy such
reporting obligations may lead to the imposition of substantial penalties.
12. NOMINEE REPORTING
Under Section 6031(c) of the Code, persons who hold an interest in USRP as
a nominee for another person must report certain information to USRP.
Temporary Treasury Regulations provide that such information should include (i)
the name, address and taxpayer identification number of the beneficial owners
and the nominee; (ii) whether the beneficial owner is (a) a person that is not
a United States person, (b) a foreign government, an international organization
or any wholly owned agency or instrumentality of either of the foregoing, or
(c) a tax-exempt entity; (iii) the amount and description of Units held,
acquired or transferred for the beneficial owners; and (iv) certain information
including the dates of acquisitions and transfers, means of acquisitions and
transfers, and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are required to
furnish additional information, including whether they are a United States
person and certain information on Units they acquire, hold or transfer for
their own account. A penalty of $50 per failure (up to a maximum of $100,000
per calendar year) is imposed for failure to report such information to USRP.
The nominee is required to supply the beneficial owner of the Units with the
information furnished to USRP.
13. STATE AND OTHER TAXES
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the partners reside or in which either Partnership does
business or owns property. Although an analysis of those various taxes cannot
be presented here, each prospective Unitholder should consider the potential
impact of such taxes on his investment in USRP. The Operating Partnership owns
property and does business in 44 states. A Unitholder will likely be required
to file state income tax returns in such states (other than states such as
Texas and Florida not having a state income tax or states in
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<PAGE>
which USRP is required or has elected to withhold and pay taxes on behalf of
the Unitholders) and may be subject to penalties for failure to comply with
such requirements. In addition, an obligation to file tax returns or to pay
taxes may arise in other states. Moreover, in certain states, tax losses may
not produce a tax benefit in the year incurred (if, for example, the partner
has no income from sources within that state) and also may not be available
to offset income in subsequent taxable years.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states or localities,
of his investment in USRP. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with regard
to those matters. Further, it is the responsibility of each Unitholder to file
all state and local, as well as federal, tax returns that may be required of
such Unitholder.
C. DIFFERENCES BETWEEN A PARTNERSHIP AND A REIT
The following is a summary of the material differences, as more
specifically described above under "The Merger Alternative" and "The Exchange
Alternative," between the federal tax consequences applicable to a partnership
and its partners versus those applicable to a REIT and its stockholders.
TAXATION OF ENTITY. A partnership is not a taxable entity. A
partnership's partners recognize their allocable share of the
partnership's taxable income or loss. A REIT is a taxable entity and must
pay tax at the corporate rates on its taxable income, but it is allowed a
deduction for distributions to its stockholders. Consequently, a REIT may
avoid federal income taxation. The Code contains several special
provisions that may apply to a REIT to cause it to pay certain taxes.
FLOW THROUGH OF LOSS. A partnership's taxable loss is allocated to
its partners, who may utilize such losses subject to various limitations.
Losses of a REIT do not flow through to its stockholders.
CHARACTER OF INCOME OR LOSS. Each item of income or loss of a
partnership (E.G., as rent, interest, dividends, capital gain, etc.)
retains its character as it is allocated to the partners. This may be
relevant for various provisions of the Code including the limitation on
passive activity losses, alternative minimum tax, limitations on itemized
deductions, etc. As described above under "--The Merger Alternative--Tax
Consequences of the REIT Corporation's Qualification as a REIT--Taxation
of Stockholders," taxable distributions from a REIT are treated as
dividends except to the extent that such distributions are designated as
capital gain distributions.
BASIS. A partner's basis in a partnership is increased by the
partnership's income and such partner's share of partnership indebtedness,
and is decreased by losses, distributions and reductions in his share of
partnership indebtedness. The basis of a REIT stockholder is not affected
by the REIT's income or loss or the REIT's indebtedness, but is reduced to
the extent the shareholder receives non-taxable distributions.
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<PAGE>
REQUIREMENTS FOR QUALIFICATION. As described above under "--The
Merger Alternative--Tax Consequences of the REIT Corporation's
Qualification as a REIT--REIT Qualification," in order to remain qualified
as a REIT, a REIT must satisfy various income, asset, distribution,
shareholder and record keeping requirements. A publicly traded
partnership has certain income characterization requirements, but is
otherwise not subject to the same requirements as a REIT in order to
retain its classification as a partnership for tax purposes.
BASIS ADJUSTMENTS. A transferee Unitholder is entitled to the
benefit of certain basis adjustments under Section 754 of the Code upon a
sale or exchange of Units or the death of a Unitholder. See "--The
Exchange Alternative--Tax Treatment of Operations--Section 754 Election."
There will be no Section 754 adjustments upon the sale or exchange of
Common Stock or the death of a stockholder of the REIT Corporation.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act ("ERISA") and the prohibited
transaction provisions of Section 4975 of the Code that may be relevant to a
Unitholder (including, with respect to the discussion contained in "Status of
the Company under ERISA," to a Unitholder that is not an employee benefit plan,
another tax-qualified retirement plan, or an individual retirement account
("IRA")). This discussion does not purport to deal with all aspects of ERISA
or Section 4975 of the Code or, to the extent not preempted, state law that may
be relevant to particular employee benefit plan shareholders (including plans
subject to Title I of ERISA, other retirement plans and IRAs subject to the
prohibited transaction provisions of Section 4975 of the Code and governmental
plans or church plans that are exempt from ERISA and Section 4975 of the Code
but that may be subject to state law requirements) in light of their particular
circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A UNITHOLDER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN OR AN IRA
OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT TO THE PURCHASE,
OWNERSHIP OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether
an investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require that an ERISA Plan's investments be (i)
prudent and in the best interests of the ERISA Plan, its participants and
beneficiaries, (ii) diversified in order to reduce the risk of large losses,
unless it is clearly prudent not to do so, and
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<PAGE>
(iii) authorized under the terms of the governing documents of the ERISA
Plan. In determining whether any investment in the Common Stock is prudent
for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should
consider all of the facts and circumstances, including whether the investment
is reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow and funding
requirements of the ERISA Plan, and the liquidity and current return of the
ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business and other matters described under "Risk Factors."
Fiduciaries of ERISA Plans, as well as fiduciaries of IRAs, retirement
plans for self-employed individuals ("Keogh Plans") and other plans subject to
Section 4975 of the Code (IRAs, Keogh Plans and such other plans are referred
to herein as "IRC Plans") should also consider the application of the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code in making their investment decision. A "party in interest" or
"disqualified person" with respect to an ERISA Plan or IRC Plan is subject to
(i) an initial 10% excise tax on the amount involved in any prohibited
transaction involving the assets of the plan and (ii) an excise tax equal to
100% of the amount involved if any prohibited transaction is not corrected. If
the disqualified person who engages in the transaction is the individual on
behalf of whom an IRA is maintained (or his beneficiary), the IRA may lose its
tax-exempt status and its assets may be deemed to have been distributed to such
individual in a taxable distribution on account of the prohibited transaction.
In addition, a fiduciary who permits an ERISA Plan to engage in a transaction
that the fiduciary knows or should know is a prohibited transaction may be
liable to the ERISA Plan for any loss the ERISA Plan incurs as a result of the
transaction and for any profits earned by the fiduciary in the transactions.
In addition to liability for ERISA Plan losses, ERISA imposes a civil
penalty against fiduciaries of ERISA Plans who breach the prudence and other
fiduciary standards of ERISA, and against non-fiduciaries who knowingly
participate in the transaction giving rise to the breach. A prohibited
transaction by an ERISA Plan fiduciary generally would constitute a breach of
the ERISA fiduciary standards. The civil penalty is equal to 20% of the amount
recovered from a fiduciary or non-fiduciary with respect to such breach or
knowing participation pursuant to a settlement agreement with the United States
Secretary of Labor or a court order resulting from a proceeding instituted by
the Secretary. The penalty may be waived and, in any event, would be offset to
the extent of the responsible party's liability for excise tax under the Code.
STATUS OF THE COMPANY UNDER ERISA
In determining whether the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and the Code apply to an entity's
operations because one or more investors in the entity's equity interest is an
ERISA Plan or an IRC Plan, it is necessary to determine whether the underlying
assets of such entity are considered "plan assets" for purposes of ERISA and
the Code. The U.S. Department of Labor has issued regulations defining "plan
assets" for this purpose (the "DOL Regulation"). An ERISA Plan fiduciary
should also consider the relevance of these principles to ERISA's prohibition
on improper delegation of responsibility for the management of plan assets, and
ERISA's imposition of co-fiduciary liability on a fiduciary
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<PAGE>
who participates in, permits (by action or inaction) the occurrence of, or
fails to remedy, a known breach by another fiduciary. In general, the DOL
Regulation provides that if an ERISA Plan or IRC Plan acquires "publicly
offered securities" of an entity, which are sold pursuant to an effective
registration statement under the Securities Act and subsequently registered
under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, which
are "widely held" (I.E., held by at least 100 holders independent of the
issuer and each other), and freely transferable, the assets of such entity
will not be considered "plan assets" solely by reason of such plan's
investment in the entity.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock being offered
hereby will be passed upon for the REIT Corporation by Winstead Sechrest &
Minick P.C., Dallas, Texas. The federal income tax consequences in connection
with the Conversion will be passed upon for USRP by Winstead Sechrest & Minick
P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of USRP as of December 31, 1996 and
1995, the related consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1996 and the
balance sheet of U.S. Restaurant Properties, Inc. as of February 4, 1997,
included in this Proxy Statement/Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are included
and incorporated by reference herein, and have been so included and
incorporated in reliance upon the reports of such firm given upon their
authority as an expert in accounting and auditing.
162
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PRO FORMA FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheet as of December 31, 1996. . . . . . . . . . F-4
Condensed Consolidated Statement of Income for the year ended
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . F-7
U.S. RESTAURANT PROPERTIES, INC.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . F-10
Balance Sheet as of February 4, 1997. . . . . . . . . . . . . . . . . F-11
Notes to Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . F-12
U.S. RESTAURANT PROPERTIES MASTER L.P.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . F-14
Consolidated Balance Sheets at December 31, 1995 and 1996 . . . . . . F-15
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-16
Consolidated Statements of Partners' Capital for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-17
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-18
Notes to Consolidated Financial Statements for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . F-20
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma consolidated financial statements of U.S.
Restaurant Properties, Inc. (the "REIT Corporation") should be read in
conjunction with the consolidated financial statements of U.S. Restaurant
Properties Master L.P. ("USRP") and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this Proxy
Statement/Prospectus. The pro forma consolidated financial statements are not
necessarily indicative of what the REIT Corporation's financial position or
results of operations would have been had the transactions described below
occurred on the assumed dates. Such financial statements also do not purport to
represent the future financial position or results of operations of the REIT
Corporation.
The attached pro forma consolidated financial statements have been prepared
based upon the REIT Corporation consolidating the operations of USRP including
U.S. Restaurant Properties Operating L.P. and other majority owned entities
(USRP and other majority owned entities collectively, the "Partnerships"). The
basis for the consolidation is because the REIT Corporation, or a wholly-owned
subsidiary thereof, will be the managing general partner of the Partnerships and
management of the REIT Corporation will have complete control over the
Partnerships through its right to make major decisions such as the acquisition,
sale, financing or refinancing of principal partnership assets, issuance of debt
or equity securities, declaration and payment of dividends or distributions and
all other business matters.
The pro forma consolidated balance sheet of the REIT Corporation as of
December 31, 1996 is based upon USRP's December 31, 1996 audited balance sheet
adjusted to reflect as of December 31, 1996 (i) the purchase of 45 properties
for $27,946,000 completed since December 31, 1996, including the value of
118,582 Units of $3,320,000, (ii) the purchase of 16 properties from QSR Income
Properties, Ltd. ("QSR") for 277,131 Units (at $28.50 per Unit), (iii) the
purchase of 103 properties from other sellers that as of April 17, 1997 are
under binding contracts for $64,148,000, including the value of 210,526 Units
valued at $6,000,000, (iv) the additional borrowings of $82,372,000 required to
purchase the properties acquired and under contract, (v) the sale of four
properties for $2,892,000, (vi) the Managing General Partner's assignment of its
Property Management Contract to the Operating Partnership or USRP (depending
upon how the Conversion is effected) and converting its aggregate 1.98%
partnership interest in the Partnerships (the "Partnership Interests") into
850,000 shares of Common Stock or its equivalent in a limited partner interest
in the Operating Partnership or Units (depending upon how the Conversion is
effected) with the common stock valued at the current market price (assumed
$28.50 per share) and the related cost of this transaction aggregating $580,000
and (vii) consolidation with the REIT Corporation. The property acquisitions
will be accounted for as purchases and the assignment of the Property Management
Contract and the cost of the transaction will be expensed as nonrecurring items.
F-2
<PAGE>
The pro forma condensed consolidated statement of income of the REIT
Corporation for the year ended December 31, 1996 is based upon USRP's audited
statement of income for the year ended December 31, 1996, adjusted to reflect as
of January 1, 1996; (i) the purchase of 229 properties for $133,051,000,
including the value of 503,418 Units of $11,232,296 completed since December 31,
1995, (ii) the issuance of 1,800,000 Units issued in June 1996 having net
proceeds of $40,203,000, (iii) the purchase of 16 properties from QSR for
277,131 Units (at $28.50 per Unit), (iv) the purchase of 103 properties from
other sellers that as of April 17, 1997 are under binding contracts for
$64,148,000, including the value of 210,526 Units valued at $6,000,000, (v) the
additional borrowings of $140,927,000 required to purchase the properties
acquired and under contract, (vi) the sale of four properties for $2,892,000,
and (vii) the Managing General Partner's assignment of its Property Management
Contract to the Operating Partnership or USRP (depending upon how the Conversion
is effected) and converting its aggregate 1.98% partnership interest in the
Partnerships (the "Partnership Interests") into 850,000 shares of Common Stock
or its equivalent in a limited partner interest in the Operating Partnership or
Units (depending upon how the Conversion is effected) with the common stock
valued at the current market price (assumed $28.50 per share). The termination
of the Property Management Contract and the REIT organization costs are being
treated as nonrecurring expenses of $23,046,000 and $580,000, respectively, and
are not reflected in the pro forma condensed consolidated statement of income.
However, they will be expensed when incurred.
When determining the number of Units that USRP will issue to QSR in
exchange for the QSR's assets, USRP has assumed that the adjusted purchase price
for QSR's assets equaled $7,721,234 plus the current principal balance of the
promissory notes of $177,000 that QSR will sell to the Partnerships and that the
average closing price for a Unit for the five trading days immediately preceding
the closing date equaled $28.50. If the average trading price of the Units
increases before the closing date, USRP could issue significantly fewer Units to
QSR or if the trading price decreases before the closing date, USRP could issue
significantly more Units to QSR.
F-3
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
U.S. Restaurant Properties Master L.P.
-----------------------------------------------------------------------
Other Properties Property
QSR's Under Contract Under Contract REIT Company
Historical Purchases(a) Properties(b) To Purchase(c) For Sale(d) Conversion Pro Forma
---------- ------------ ------------- ---------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash . . . . . . . . . . . . . . . . . $ 381 $ $ 169 $ $ 2,892 $ 1(e) $ 3,443
Receivables, net . . . . . . . . . . . 2,117 2,117
Purchase deposits. . . . . . . . . . . 908 (280) (350) (122) 156
Prepaid expenses . . . . . . . . . . . 403 403
Deferred rent receivable . . . . . . . 536 536
Notes receivable . . . . . . . . . . . 4,046 76 177 4,299
Net investment in
direct financing
leases. . . . . . . . . . . . . . . . 17,105 (446) 16,659
Land . . . . . . . . . . . . . . . . . 61,340 5,574 1,580 13,082 (341) 81,235
Buildings and
leasehold
improvements,
net . . . . . . . . . . . . . . . . . 75,339 22,296 6,322 51,066 (191) 154,833
Machinery and
equipment, net. . . . . . . . . . . . 2,980 2,980
Intangibles, net . . . . . . . . . . . 12,263 (340) 11,923
-------- ------- ------ ------- ------- --------- --------
$177,418 $27,666 $7,898 $64,026 $ 1,574 $ 1 $278,583
-------- ------- ------ ------- ------- --------- --------
-------- ------- ------ ------- ------- --------- --------
Accounts payable . . . . . . . . . . . $ 2,697 $ $ $ $ $ 580(f) $ 3,277
Deferred gain. . . . . . . . . . . . . 590 590
Line of credit and other
long term debt . . . . . . . . . . . 69,486 24,346 58,026 151,858
Capitalized lease
obligations . . . . . . . . . . . . . 362 362
General Partners'
capital . . . . . . . . . . . . . . . 1,163 31 (1,194)(g)
Limited Partners'
capital . . . . . . . . . . . . . . . 103,120 3,320 7,898 6,000 1,543 (121,881)(g)
Stockholders' equity . . . . . . . . . 122,496(h) 122,496
-------- ------- ------ ------- ------- --------- --------
$177,418 $27,666 $7,898 $64,026 $ 1,574 $ 1 $278,583
-------- ------- ------ ------- ------- --------- --------
-------- ------- ------ ------- ------- --------- --------
</TABLE>
- ------------------------
F-4
<PAGE>
(a) Reflects pro forma adjustments for 1997 acquisitions completed since
December 31, 1996 which consist of the purchase of 45 properties as
follows:
Arby's . . . . . . . . 2 $ 378
Bruegger's Bagels. . . 16 11,010
Chi Chi's. . . . . . . 1 1,419
Old Chicago Pizza. . . 1 909
Pizza Hut. . . . . . . 8 4,633
Schlotzsky's . . . . . 6 4,916
Other. . . . . . . . . 11 4,605
-- -------
45 $27,870
-- -------
-- -------
Total of land, buildings and leasehold
improvements and machinery and
equipment . . . . . . . . . . . . . . . $27,870
Note receiveable . . . . . . . . . . . . . 76
Less purchase deposit previously paid . . (280)
Less 118,582 Units issued . . . . . . . . (3,320)
-------
Increase in line of credit and other
long term debt. . . . . . . . . . . . . $24,346
-------
-------
The respective purchase price for the properties has been allocated
between land ($5,574) and buildings and leasehold improvements
($22,296) on a preliminary basis. Final determination of the proper
allocation between these accounts will be made prior to finalizing the
financial statements for the year ended December 31, 1997. Management
does not expect material adjustments to occur.
(b) Reflects the pro forma adjustments for QSR's properties which are
comprised of 16 properties. The total purchase price plus appropriate
capitalized costs are as follows:
16 properties. . . . . . . . . . . . . . $ 7,721
Acquisition costs. . . . . . . . . . . . 181
-------
Total land, buildings and leasehold
improvements. . . . . . . . . . . . . 7,902
Notes receivable . . . . . . . . . . . . 177
-------
8,079
Less purchase deposit previously paid. . (350)
Less 277,131 Units issued. . . . . . . . (7,898)
-------
Cash excess (deposit return less
acquisition costs). . . . . . . . . . $ 169
-------
-------
The respective purchase price for the properties has been allocated
between land ($1,580) and buildings and leasehold improvements
($6,322) on a preliminary basis. Final determination of the property
allocation between these accounts will be made prior to finalizing the
financial statements for the year ended December 31, 1997. Management
does not expect material adjustments to occur.
(c) Reflects the pro forma adjustments for the properties under binding
contracts as of April 17, 1997 which are comprised of 103 properties
as follows:
F-5
<PAGE>
Number of Properties Purchase Price
-------------------- --------------
Arby's . . . . . . . . . . . . . 76 $45,093
Bruegger's Bagels. . . . . . . . 1 752
Dairy Queen. . . . . . . . . . . 2 944
Hardees. . . . . . . . . . . . . 3 1,376
Other. . . . . . . . . . . . . . 21 15,983
--- -------
103 64,148
--- -------
--- -------
Less purchase deposits
previously paid . . . . . . . (122)
Less 210,526 Units issued . . . . (6,000)
Increase in line of credit and
other long-term debt . . . . . $58,026
The respective purchase price for the properties has been allocated between
land ($13,082) and buildings and leasehold improvements ($51,066) on a
preliminary basis. Final determination of the property allocation between
these accounts will be made prior to finalizing the financial statements
for the year ended December 31, 1997. Management does not expect material
adjustments to occur.
(d) Reflects the pro forma adjustments for four properties which are for sale
under a binding contract.
(e) Reflects pro forma adjustment for the contribution of $1 by QSV Properties
to capitalize the REIT Corporation.
(f) Reflects the costs associated with the REIT conversion including legal,
filing, printing, fairness opinion and related costs.
(g) Reflects pro forma adjustments to convert the General Partner's and limited
partners' capital accounts into stockholders' equity. It is assumed that
the Units owned by the limited partners will immediately be converted to
the REIT Corporation's shares.
(h) Reflects the following pro forma adjustment to stockholders' equity
relating to the Managing General Partner's assignment of its Property
Management Contract to the Operating Partnership or USRP (depending upon
how the Conversion is effected) and converting its aggregate 1.98%
partnership interest in the Partnerships (the "Partnership interests") into
850,000 shares of Common Stock or its equivalent in a limited partner
interest in the Operating Partnership or Units (depending upon how the
Conversion is effected) with the common stock valued at the current market
price (assumed $28.50 per share):
Value of 850,000 Initial Shares of Common
Stock or its equivalent in interests in the
Partnerships (at $28.50 per share current
market value) issued to the Managing General
Partner $ 24,225
Cost of property management contract to be
expensed (23,031)
REIT organization costs to be expensed (580)
Equity related to Limited Partners upon
Conversion 121,881
REIT Corporation equity 1
--------
$122,496
--------
--------
F-6
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS AND UNITS/SHARES IN THOUSANDS,
EXCEPT FOR PER UNIT AND SHARE DATA)
<TABLE>
U.S. Restaurant Properties Master L.P.
-----------------------------------------------------------
Other Properties Property
QSR's Under Contract Under Contract REIT Company
Historical Purchases(a) Properties(b) To Purchase(c) For Sale(l) Conversion(d) Pro Forma
---------- ----------- ------------- --------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues . . . . . . $ 18,324 $ 10,907 $ 1,327 $ 7,441 $ (280) $ $ 37,719
Expenses:
Rent. . . . . . . . . . . 2,080 232 115 97 2,524
Depreciation and
amortization . . . . . . 3,978 2,998(e) 337(e) 2,553(g) (43) (87)(f) 9,736
Taxes, general and
administrative . . . . . 2,461 979(g) 45(g) 682(g) (2,232)(h) 1,935
Interest expense
(income), net. . . . . . 2,364 4,543(i) 19(i) 4,328(i) 11,254
-------- -------- -------- -------- ------- --------- --------
Total expenses. . . . . . 10,883 8,752 516 7,660 (43) (2,319) 25,449
-------- -------- -------- -------- ------- --------- --------
Gain on Sale of
equipment . . . . . . . . 32 32
-------- -------- -------- -------- ------- --------- --------
Net income . . . . . . . . $ 7,473 $ 2,155 $ 811 $ (219) $ (237) $ 2,319 $ 12,302
-------- -------- -------- -------- ------- --------- --------
-------- -------- -------- -------- ------- --------- --------
Net income allocable
to unitholders. . . . . . $ 7,325
Average number
of units/shares
outstanding . . . . . . . 6,107 119 277(j) 211 851(k) 8,352
Net income per
unit/share. . . . . . . . $ 1.20 $ 1.47
</TABLE>
- -----------------------
(a) Reflects pro forma adjustments to operations for the 1996 acquisitions,
comprised of 184 properties acquired on various dates from January 1, 1996
through December 31, 1996 and the 1997 acquisitions comprised of 45
properties acquired on various dates from January 1, 1997 through April 17,
1997.
(b) Reflects pro forma adjustments for QSR's 16 properties based on historical
information.
(c) Reflects the pro forma adjustments for 103 properties under binding
contracts as of April 17, 1997 with other sellers based on historical
information.
(d) Reflects pro forma adjustments relating to the effects of the Managing
General Partner's assignment of its Property Management Contract to the
Operating Partnership or USRP (depending upon how the Conversion is
effected).
No adjustment is shown for the cost of terminating the Managing General
Partner's property management contract estimated to be $23,046 or for the
legal, filing, printing, fairness opinion and related costs of completing
the REIT conversion estimated to be $580 since both of these amounts are
considered to be nonrecurring expenses. Costs related to the
reorganization will be charged to expense in the period incurred
F-7
<PAGE>
and the cost related to the property management contract will be expensed
at the time the contract is terminated.
(e) Reflects pro forma increase in depreciation expense related to the purchase
of the respective properties and the related capitalization of fees and
commissions including fees paid or payable to the Managing General Partner.
Depreciation is computed using the straight line method and estimated
useful lives of buildings and leasehold improvements and machinery and
equipment of 10 to 20 years.
(f) Reflects pro forma adjustment to depreciation and amortization expense.
The reduction in expense is due to a decrease in fees paid to the Managing
General Partner assuming the Property Management Contract is canceled.
Such fees consist of 1% of the contracted purchase price for the respective
properties which is capitalized as part of the purchase price.
(g) Reflects pro forma increase in general and administrative expenses
attributable to the increase in fees due to the Managing General Partner.
Such increase is comprised of 1% of the contracted purchase price for the
respective properties and 25% of the cash flow received with respect to
such additional properties in excess of the cash flow representing a 12%
annual rate of return.
(h) Pro forma adjustments to general and administrative expense are comprised
of the following:
Decrease in management fees $(2,982)
Increase in payroll expenses (currently
being paid by the Managing General
Partner) 750
-------
Net decrease $(2,232)
-------
-------
All other general and administrative expenses are not expected to increase
as a result of the conversion to a REIT since the Partnership is already a
public entity exempt from federal income taxes.
(i) Reflects the pro forma adjustment to interest expense as a result of the
purchase of the respective properties. Pro forma interest expense is based
on the increase in debt outstanding and borrowings for payment of
distributions on units issued on a pro forma basis using interest rates
based on the Partnership's credit arrangements which are as follows:
Principal Interest Rate
Series A Senior Secured Guaranteed Notes $12,500 8.00%
Series B Senior Secured Guaranteed Notes 27,500 8.30%
Line of credit 95,000 7.18%
Additional borrowings are estimated at a rate of 8.5% based upon the
additional debt agreements the Company is in the process of negotiating.
(j) Reflects pro forma adjustments for Partnership Units to be issued to QSR in
exchange for QSR's 16 properties established as follows:
Purchase price $ 7,898
Market value of shares at January 6, 1997 $ 28.50
Partnership Units to be issued 277,131
(k) Pro forma adjustment reflects the 850 Initial shares of Common Stock or its
equivalent in interests in the Partnerships to be issued to the Managing
General Partner for its interests in the Partnerships and
F-8
<PAGE>
termination of its property management contract and shares of Common Stock
issued by the REIT Corporation to the Managing General Partner upon
formation of the REIT Corporation at $1 per share.
(l) Reflects the pro forma adjustments relating to a property which is for sale
under a binding contract.
F-9
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholder of
U.S. Restaurant Properties, Inc.
We have audited the accompanying balance sheet of U.S. Restaurant Properties,
Inc. as of February 4, 1997. This balance sheet is the responsibility of the
management of U.S. Restaurant Properties, Inc. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of U.S. Restaurant Properties, Inc. at February 4, 1997,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 5, 1997
F-10
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
BALANCE SHEET
FEBRUARY 4, 1997
ASSETS
Cash $ 1,000
--------
--------
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value per share; 10,000,000 shares
authorized, no shares issued
Common Stock, $.001 par value per share; 45,000,000 shares
authorized; 1,000 shares issued and outstanding $ 1
Excess Stock, $.001 par value per share; 5,000,000 shares
authorized, no shares issued
Additional paid-in capital 999
--------
$ 1,000
--------
--------
See Notes to Balance Sheet.
F-11
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
FEBRUARY 4, 1997
1. ORGANIZATION
U.S. Restaurant Properties, Inc. (the "Company") is a newly-organized
Maryland corporation formed to continue the restaurant property management
operations of U.S. Restaurant Properties Master, L.P. (collectively, with its
subsidiaries, "USRP"). The Company is authorized to issue up to 45,000,000
shares of common stock, par value $.001 per share (the "Common Stock"),
10,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred
Stock") and 5,000,000 shares of Excess Stock, par value $.001 per share.
Pursuant to the Company's Articles of Incorporation (the "Articles"), any
purported transfer of shares of Common Stock or Preferred Stock that would
result in a person owning shares of Common Stock or Preferred Stock in excess of
certain limits set out in Articles will result in the shares subject to such
purported transfer being automatically exchanged for an equal number of shares
of Excess Stock.
The Company was capitalized upon the sale of 1,000 shares of Common Stock
for $1,000 to QSV Properties, Inc. ("QSV"). The Company will be a self-advised
real estate investment trust ("REIT") formed to continue the restaurant property
management, acquisition and development operations, related business objectives
and strategies of USRP. The consolidated financial statements of U.S.
Restaurant Properties, Inc. will include the operations of USRP. The Company
intends to qualify as a REIT as defined under the Internal Revenue Code of 1986,
as amended.
2. BUSINESS
The Company shall invest in U.S. Restaurant Properties Operating, L.P. (the
"Operating Partnership" and, together with USRP, the "Partnerships"), which will
include and continue all operations of USRP. The purpose of this investment is
to facilitate the conversion of USRP's ownership structure from a master limited
partnership to a REIT. The Company was formed on February 4, 1997 and will not
have any operations until the Conversion is effected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company shall succeed to the operations of USRP, and accordingly, will
follow all accounting principles established by USRP in addition to the
following:
INCOME TAXES - Provisions for income taxes will be made in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
F-12
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
4. SUBSEQUENT EVENTS
QSV has agreed to convert the Operating Partnership General Partnership
Interest and QSV's general partner interest in U.S. Restaurant Properties Master
L.P. Operating Partnership General Partner Interest of in exchange for 850,000
shares or its equivalent in interests in the Partnerships. An additional
550,000 shares or its equivalent in interests in the Partnerships may be issued
to QSV if certain earnings targets are met by the year 2000. QSV is an entity
that is primarily owned by Mr. Robert J. Stetson and Mr. Fred H. Margolin.
The Company intends to enter into employment agreements with Messrs.
Stetson and Margolin. The agreements will be for three years, beginning with
the closing of the Acquisition. Pursuant to the Employment Agreements, Mr.
Stetson will serve as President and Chief Executive Officer of the Company and
Mr. Margolin will serve as Chairman of the Board of the Company and each will be
paid an annual base salary of $250,000.
F-13
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
INDEPENDENT AUDITORS' REPORT
The Partners
U.S. Restaurant Properties Master L.P.
We have audited the accompanying consolidated balance sheets of U.S.
Restaurant Properties Master L.P. (the Partnership) as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' capital, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of U.S. Restaurant Properties
Master L.P. as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
F-14
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 31,
--------------------------
1995 1996
----------- -----------
Cash and equivalents . . . . . . . . . . . . . $ 7 $ 381
Receivables, net (includes $188 in 1996
from related parties). . . . . . . . . . . . 951 2,117
Deferred rent receivable . . . . . . . . . . . -- 536
Purchase deposits. . . . . . . . . . . . . . . 1,792 908
Prepaid expenses . . . . . . . . . . . . . . . 315 403
Notes receivable . . . . . . . . . . . . . . . -- 1,308
Notes receivable - related parties . . . . . . 269 2,738
Net investment in direct financing leases. . . 19,371 17,105
Land . . . . . . . . . . . . . . . . . . . . . 27,493 61,340
Buildings and leasehold improvements, net. . . 7,900 75,339
Machinery and equipment, net . . . . . . . . . 224 2,980
Intangibles, net . . . . . . . . . . . . . . . 13,161 12,263
----------- -----------
$ 71,483 $ 177,418
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable (includes $416 and $187
due to the Managing General Partner) . . . . $ 677 $ 2,642
Deferred rent payable. . . . . . . . . . . . . -- 55
Deferred gain on sale of property. . . . . . . -- 590
Lines of credit. . . . . . . . . . . . . . . . 10,931 69,486
Capitalized lease obligations. . . . . . . . . 563 362
Commitments (Notes 8 and 9). . . . . . . . . .
General Partners' capital. . . . . . . . . . . 1,241 1,163
Limited Partners' capital. . . . . . . . . . . 58,071 103,120
----------- -----------
$ 71,483 $ 177,418
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per-unit data)
Year Ended December 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES FROM LEASED PROPERTIES
Rental income . . . . . . . . . . . $ 6,340 $ 7,540 $ 16,346
Amortization of unearned
income on direct financing
leases. . . . . . . . . . . . . . 2,453 2,240 1,978
----------- ----------- -----------
Total Revenues. . . . . . . . . . . 8,793 9,780 18,324
EXPENSES
Rent. . . . . . . . . . . . . . . . 1,348 1,405 2,080
Depreciation and amortization . . . 1,361 1,541 3,978
Taxes, general and
administrative (includes
$542, $164 and $1,268 in 1994,
1995 and 1996, respectively,
for services of the Managing
General Partner). . . . . . . . . 1,144 1,419 2,461
Interest expense (income), net. . . (4) 192 2,364
Provision for write-down or
disposition of properties . . . . 11 - -
----------- ----------- -----------
Total Expenses. . . . . . . . . . . 3,860 4,557 10,883
Gain on sale of equipment . . . . . . - - 32
----------- ----------- -----------
Net income. . . . . . . . . . . . . . $ 4,933 $ 5,223 $ 7,473
----------- ----------- -----------
----------- ----------- -----------
Net income allocable to
unitholders . . . . . . . . . . . . $ 4,834 $ 5,119 $ 7,325
----------- ----------- -----------
----------- ----------- -----------
Average number of outstanding
units . . . . . . . . . . . . . . . 4,635 4,638 6,107
----------- ----------- -----------
----------- ----------- -----------
Net income per unit . . . . . . . . . $ 1.04 $ 1.10 $ 1.20
----------- ----------- -----------
----------- ----------- -----------
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
General Limited
Units Partners Partners Total
----- ------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 . . . . . . . . . . . 4,635 $ 1,357 $ 62,757 $ 64,114
Net income . . . . . . . . . . . . . . . . . . . - 99 4,834 4,933
Cash distributions . . . . . . . . . . . . . . . - (148) (7,230) (7,378)
----- ------- --------- ---------
Balance at December 31, 1994 . . . . . . . . . . 4,635 1,308 60,361 61,669
----- ------- --------- ---------
Special general partner interest transfer. . . . - (13) (3) (16)
Net income . . . . . . . . . . . . . . . . . . . - 104 5,119 5,223
Purchase of partnership units. . . . . . . . . . (30) - (547) (547)
Units issued for property. . . . . . . . . . . . 54 - 985 985
Cash distributions . . . . . . . . . . . . . . . - (158) (7,844) (8,002)
----- ------- --------- ---------
Balance at December 31, 1995 . . . . . . . . . . 4,659 1,241 58,071 59,312
----- ------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . - 148 7,325 7,473
Units issued for property. . . . . . . . . . . . 385 - 7,912 7,912
Proceeds from units issued in public offering. . 1,800 - 40,203 40,203
Proceeds from exercised unit options . . . . . . 50 - 775 775
Cash distributions . . . . . . . . . . . . . . . - (226) (11,166) (11,392)
----- ------- --------- ---------
Balance at December 31, 1996 . . . . . . . . . . 6,894 $ 1,163 $ 103,120 $ 104,283
----- ------- --------- ---------
----- ------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . $ 4,933 $ 5,223 $ 7,473
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization. . . . . . 1,361 1,541 3,978
Amortization of deferred
financing costs . . . . . . . . . . . . - - 162
Other, net . . . . . . . . . . . . . . . (843) 854 (32)
Increase in receivables, net . . . . . . (301) (236) (1,166)
Increase in prepaid expenses . . . . . . (36) (192) (88)
Increase in deferred rent receivable . . - - (536)
Reduction in net investment in
direct financing leases . . . . . . . . 1,673 1,866 2,041
Increase in accounts payable . . . . . . 203 232 1,965
Increase in deferred rent payable. . . . - - 55
--------- --------- ---------
2,057 4,065 6,379
--------- --------- ---------
Cash provided by operating
activities. . . . . . . . . . . . . . . 6,990 9,288 13,852
CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment . . . . . . . . . . . . . - - 122
Purchase of property - (9,746) (95,918)
Purchase of machinery and
equipment . . . . . . . . . . . . . . . - (232) (3,032)
Purchase deposits (paid) used. . . . . . - (1,792) 884
Increase in notes receivable . . . . . . - (269) (3,034)
--------- --------- ---------
Cash used in investing activities. . . . - (12,039) (100,978)
CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES:
Loan origination costs
and other intangibles . . . . . . . . . - (77) (440)
F-18
<PAGE>
Year Ended December 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Payments on capitalized lease
obligations . . . . . . . . . . . . . . (191) (212) (201)
Proceeds from line of credit. . . . . . . - 12,453 104,805
Payments on line of credit. . . . . . . . - (1,522) (46,250)
Cash distributions. . . . . . . . . . . . (7,378) (8,002) (11,392)
Purchase of partnership units . . . . . . - (547) -
Purchase of special general
partner interest. . . . . . . . . . . . - (16) -
Proceeds from issuance of units . . . . . - - 40,978
---------- ---------- ----------
Cash provided by (used in) financing
activities. . . . . . . . . . . . . . . (7,569) 2,077 87,500
---------- ---------- ----------
Increase (decrease) in cash and
equivalents . . . . . . . . . . . . . . (579) (674) 374
Cash and equivalents at
beginning of year . . . . . . . . . . . 1,260 681 7
---------- ---------- ----------
Cash and equivalents at end of
year. . . . . . . . . . . . . . . . . . $ 681 $ 7 $ 381
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year . . . . . $ 90 $ 256 $ 2,431
---------- ---------- ----------
---------- ---------- ----------
NONCASH INVESTING
ACTIVITIES
Units issued for property . . . . . . . $ - $ 985 $ 7,912
---------- ---------- ----------
---------- ---------- ----------
Deferred gain on sale
of property . . . . . . . . . . . . . $ - $ - $ 590
---------- ---------- ----------
---------- ---------- ----------
Note received on sale
of property . . . . . . . . . . . . . $ - $ - $ 743
---------- ---------- ----------
---------- ---------- ----------
Sale of property on direct
financing lease . . . . . . . . . . . $ - $ - $ 225
---------- ---------- ----------
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F-19
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollars in thousands except per-unit amounts)
1. ORGANIZATION
U.S. Restaurant Properties Master L.P (Partnership), formerly Burger King
Investors Master L.P, a Delaware limited partnership, was formed on December 10,
1985. The Partnership, through its 99.01% limited partnership interest in U.S.
Restaurant Properties Operating L.P. (Operating Partnership), also a Delaware
limited partnership, acquired from Burger King Corporation (BKC) in February
1986 for $94,592 an interest in 128 restaurant properties owned or leased by BKC
and leased or subleased on a net lease basis to BKC franchisees. The
Partnership is the sole limited partner of the Operating Partnership, and they
are referred to collectively as the "Partnerships" or the "Partnership." QSV
Properties, Inc., (QSV), formerly U.S. Restaurant Properties, Inc., the managing
general partner, and BKC, the special general partner, were both indirect
wholly-owned subsidiaries of Grand Metropolitan PLC prior to May 17, 1994, at
which time QSV was sold to the current owners. On January 20, 1995, the
Partnership paid Burger King Corporation $16 for its 0.02% interest in the
Operating and Master Limited Partnership.
In 1996, the Partnership established certain other wholly owned operating
entities consisting of U.S. Restaurant Properties Business Trust I, U.S.
Restaurant Properties Business Trust II, Restaurant Acquisition Corporation,
Restaurant Renovation Partners L.P., U.S. Restaurant Properties West Virginia
Partners L.P., U.S. Restaurant Properties Carolina LTD., U.S. Restaurant
Properties Lincoln LTD., and U.S. Restaurant Properties Norman LTD.
Collectively, these entities in addition to the Partnerships are referred to as
the "Company." All of these entities are included in the consolidated financial
statements.
The Partnership may issue an unlimited number of units. The units
outstanding as of December 31, 1995 and 1996, totaled 4,659,167 and 6,894,003,
respectively.
QSV Properties, Inc. (formerly named U.S. Restaurant Properties, Inc.) is
the Managing General Partner of the Partnership.
2. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles; however, this will not be the basis
for reporting taxable income to unitholders (see Note 10 for a reconciliation of
financial reporting income to taxable income). The consolidated financial
statements reflect the accounts of the Company after elimination of significant
inter-entity transactions.
F-20
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
Cash and equivalents include short-term, highly liquid investments with
maturities at the date of purchase of three months or less.
An intangible asset was recorded for the excess of cost over the net
investment in direct financing leases in 1986. This intangible asset represents
the acquired value of future contingent rent receipts (based on a percentage of
each restaurant's sales) and is being amortized on a straight-line basis over 40
years. The Company's management routinely reviews the carrying amount of
intangibles based on projected cash flows. Based on the Company's policy for
evaluating impairment of intangibles, no valuation allowance was recorded as of
December 31, 1995 and 1996.
Rent revenues and expenses under operating leases are recognized on a
straight-line basis.
DEPRECIATION
Depreciation is computed using the straight-line method over estimated
useful lives of 6 to 20 years for financial reporting purposes. Accelerated and
straight-line methods are used for tax purposes.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.
LONG-LIVED ASSETS
Long-lived assets include real estate, direct financing leases and
intangibles which are evaluated on an individual property basis. The
Partnership's management routinely reviews its investments for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Based on the Company's policy for reviewing
impairment of long-lived assets, no valuation allowance was recorded as of
December 31, 1995 and 1996.
F-21
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
No federal or, in most cases, state income taxes are reflected in the
consolidated financial statements because the Partnerships are not taxable
entities. The partners must report their allocable shares of taxable income or
loss in their individual income tax returns.
EQUITY-BASED COMPENSATION
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), was issued, effective for fiscal years
beginning after December 15, 1995. This Statement requires companies to use
recognized option pricing models to estimate the fair value of equity-based
compensation, including options. This Statement also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The Company has elected not to
recognize compensation expense for employee equity-based compensation as
calculated under SFAS 123, but will recognize any related expense in accordance
with the provisions of APB Opinion No. 25. Disclosure of amounts required by
SFAS 123 is included in Note 6.
ENVIRONMENTAL REMEDIATION COSTS
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals
for estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. Company management is not aware
of any environmental remediation obligations which would materially affect the
operations, financial position or cash flows of the Company.
In 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP 96-1),
which provides guidance for the recognition, measurement, display and disclosure
of environmental remediation liabilities. The Company will adopt the provisions
of SOP 96-1 in 1997, as required, and does not expect such adoption to have a
material impact on its results of operations, financial position or cash flows.
F-22
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
3. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
could be realized upon disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Cash and equivalents, receivables (including deferred rent receivable),
accounts payable (including deferred rent payable), and the line of credit are
carried at amounts that approximate their fair value.
The fair value of notes receivable totaling $269 and $4,046 as of
December 31, 1995 and 1996, respectively, have a fair value of $269,000 and
$3,672, respectively, as based upon interest rates for notes with similar terms
and remaining maturities.
The fair value estimates presented herein are based on information
available to management as of December 31, 1995 and 1996. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
F-23
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER BALANCE SHEET INFORMATION
December 31
-----------------------
1995 1996
-------- --------
RECEIVABLES, NET
Receivables. . . . . . . . . . . . . . $ 1,068 $ 2,234
Less allowance for doubtful
accounts . . . . . . . . . . . . . . (117) (117)
-------- --------
$ 951 $ 2,117
-------- --------
-------- --------
BUILDINGS AND LEASEHOLD
IMPROVEMENTS, NET
Buildings and leasehold improvements . . $ 10,545 80,528
Less accumulated depreciation. . . . . . (2,645) (5,189)
-------- --------
$ 7,900 $ 75,339
-------- --------
-------- --------
MACHINERY AND EQUIPMENT, NET
Machinery and equipment. . . . . . . . . 232 $ 3,244
Less accumulated depreciation. . . . . . (8) (264)
-------- --------
$ 224 $ 2,980
-------- --------
INTANGIBLES, NET
Intangibles. . . . . . . . . . . . . . $ 26,515 $ 27,003
Less accumulated amortization. . . . . (13,354) (14,740)
-------- --------
$ 13,161 $ 12,263
-------- --------
-------- --------
Total purchase deposits of $1,792 and $908 at December 31, 1995 and 1996,
respectively, included $1,075 and $167 of nonrefundable deposits, respectively.
5. PROPERTY ACQUISITIONS AND DISPOSITIONS
In March 1995, the Partnership agreement was amended to expand the purpose
of the Partnership and allow for the diversification of the Partnership's
restaurant property portfolio through the acquisition of additional fast-food
and casual dining restaurant properties. Since the amendment in March 1995, the
Partnership has acquired 200 restaurant properties.
During 1996, the Company completed the purchase of 184 restaurant
properties for an aggregate purchase price of $105,336 including the value of
384,836 Partnership Units issued as part of the aggregate purchase price. Three
restaurant properties were purchased with only Partnership Units; five
restaurant properties were purchased with a combination of cash and Partnership
Units; and 166 restaurant properties were purchased with only cash. The 184
restaurant properties include 45 Burger King restaurants, 40 Dairy Queen
restaurants, 30 Grandy's restaurants, 25 Hardee's restaurants, 12 Pizza Hut
restaurants, two KFC restaurants, six Schlotzsky's restaurants, six Chili's
restaurants and 18 regional brand restaurants. The 384,836 Partnership Units
issued in four of these transactions have guaranteed Partnership Unit values
(see Note 6).
F-24
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY ACQUISITIONS AND DISPOSITIONS (CONTINUED)
During 1995, the Partnership completed the purchase of 16 restaurant
properties for an aggregate purchase price of $10,731, including the value of
54,167 Partnership Units issued. The 16 restaurant properties include 9 Burger
King restaurant properties, two Chili's restaurant properties and five regional
brand restaurant properties. The 54,167 Partnership Units issued include
provisions for guaranteed Partnership Unit values in the future (see Note 6).
During 1996, the Company sold one restaurant property for $815. The
Company received cash of $72 and a note from the buyer of $743. In accordance
with Statement of Financial Accounting Standards No. 66, "Accounting for Real
Estate Sales," the Company recorded a deferred gain on the sale of $590.
On December 31, 1996, the Company owned land at 243 restaurant properties
and leased the land at 79 restaurant properties from third-party lessors under
operating leases. The Company in turn leased or subleased the land primarily to
fast-food and casual dining restaurant operators under operating leases.
On December 31, 1996, the Company owned the buildings on 277 restaurant
properties and leased the buildings on 14 restaurant properties from third-party
lessors under leases accounted for as capital leases. The Company owns 31
restaurant properties in which only the land is owned and leased. The Company
leased 183 buildings to franchisees under operating leases. These 183 buildings
are stated at cost, net of accumulated depreciation, on the balance sheet. A
total of 108 buildings are leased primarily to franchisees under direct
financing leases. The net investment in the direct financing leases represents
the present value of the future minimum lease receipts for these 108 buildings.
One restaurant property was sold during 1996.
On December 31, 1995 and 1996, there were 138 and 321 Company restaurant
sites respectively, in operation, and there was one closed site. The Company
continues to seek a suitable tenant for the remaining site. The write-down of
the closed site was $11 in 1994. No write-downs were recorded in 1995 or 1996.
In the normal course of business, the Company may sign purchase agreements
to acquire restaurant properties. Such agreements become binding obligations
upon the completion of a due diligence period ranging usually from 15-30 days.
On December 31, 1996, earnest money purchase deposits amounting to $908
were on deposit for the purchase of six Pizza Hut restaurants, four Schlotzsky's
restaurants, three Wendy's restaurants, two Arby's restaurants, two Hardee's
restaurants, one Taco Bell restaurant, one Kentucky Fried Chicken restaurant and
19 other regional chain restaurants.
F-25
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PARTNERSHIP UNIT OPTIONS AND GUARANTEED STOCK PRICE
Three restaurant properties were acquired on October 10, 1995, with a
combination of cash and 54,167 Units. The Units are guaranteed to have a value
of $24 per unit three years from the transaction date. The unit price on the
date issued was $18.375. Any difference between the guaranteed value and the
actual value of the units at the end of the three-year period is to be paid in
cash. These properties were recorded at the guaranteed value of the Units
discounted to reflect the present value on the date the Units were issued.
During 1996, 384,836 Partnership Units were used to purchase 18 of the 184
properties in four separate transactions. Of the 384,836 Partnership Units
issued, 324,575 Partnership Units are guaranteed to have a market value of $24
per unit two years from the transaction date, 28,261 Partnership Units are
guaranteed to have a market value of $23 per unit three years from the
transaction date and 32,000 Partnership Units are guaranteed to have a value of
$25 per unit two years from the transaction date. The accounting described in
the paragraph above was used to record these transactions.
The Partnership has one fixed option plan. Under this plan, the Limited
Partners on March 17, 1995 granted the Managing General Partner options to
acquire up to 400,000 Partnership Units, subject to certain adjustments under
antidilution provisions. The exercise price of each option is $15.50 which is
the average closing price of the depository receipts for the Partnership Units
on the New York Stock Exchange for the five trading days immediately after the
date of grant. The options are nontransferable except by operation of law and
vest and became exercisable in March 1996. The term of the options expires in
March 2005. As of December 31, 1996, the Managing General Partner had exercised
50,000 Partnership Units at the option price of $15.50 for a total purchase
price of $775.
In accordance with SFAS 123, the fair value of each option is estimated on
the date of the grant using the binomial option-pricing model with the following
weighted-average assumptions: dividend yield of 7.3% for all years; expected
volatility of 17.8%, risk free interest rate of 5.7% for the options; and
expected lives of 4 years for the plan options.
As of March 17, 1995, the 400,000 options which are described above had a
fair value as of the grant date of $724 representing a value per option of
$1.81.
Under the fixed option plan, if these options were considered as
compensation, net income would have been $4,680 and $7,292 as of December 31,
1995 and 1996, respectively. Net income per unit would have been $0.99 and
$1.17 as of December 31, 1995 and 1996, respectively.
F-26
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LINES OF CREDIT
On December 31, 1995 and 1996, $10,931 and $65,396, respectively, had been
drawn on the Company's primary line of credit. The Company's line of credit was
increased to $95,000 in December 1996 and matures on December 23, 1998.
Substantially all properties are included as collateral on this line of credit.
The interest rate on this debt floats at 180 basis percentage points above
LIBOR. The effective interest rate at December 31, 1996, was 7.3625%. There is
an unused line of credit fee of .25% per annum of the average daily excess of
the commitment amount over the aggregate unpaid balance on the revolving loan
which is charged and is payable on a quarterly basis. The line of credit
requires the Company to maintain a combined tangible net worth, as defined in
the loan document, in excess of $85,000; maintain a combined GAAP Partners'
Capital, as defined in the loan document, of not less than $100,000; maintain a
cash flow coverage ratio of not less than .95 to 1 based upon a pro forma
five-year bank debt amortization; and maintain certain other financial covenants
as defined in the loan agreement. The Company's management believes it is in
compliance with all loan provision requirements as of December 31, 1996. On
December 31, 1996, the balance available on the line of credit equaled $29,600
(considers $400 subject to outstanding letter of credit).
A revolving credit facility of $20,000 was established with a national
mortgage company on April 29, 1996. The interest rate on this credit facility
was LIBOR plus 300 basis points which resulted in an interest rate of 8.5625% at
December 31, 1996. This revolving credit facility is secured by approximately
63 properties. On December 31, 1996, the total amount due equaled $4,090. This
revolving credit facility was paid in full in January 1997 and no additional
draws are available.
8. INVESTMENTS AND COMMITMENTS AS LESSOR
The Company leases land and buildings to a variety of national and regional
fast-food chain and casual dining restaurants. The building portions on 108 of
these properties, which are leased by BKC franchisees, are accounted for as
direct financing leases while the land portions are operating leases. The
leases generally provide for a term of 20 years from the opening of the related
restaurant, and do not contain renewal options. The Partnerships, however, have
agreed to renew a franchise lease if BKC or any of their other franchise chains
renews or extends the lessee's franchise agreement.
As of December 31, 1996, the remaining lease terms of all leases described
in the above paragraph and in Note 5 ranged from 1 to 28 years and include
various renewal options. The leases provide for minimum rents and contingent
rents based on a percentage of each restaurant's sales and require the
franchisee to pay executory costs.
F-27
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
Direct
Financing Operating
Leases Leases
--------- ---------
MINIMUM FUTURE LEASE RECEIPTS FOR
YEARS ENDING DECEMBER 31:
1997. . . . . . . . . . . . . . . . . . . . $ 4,071 $ 17,060
1998. . . . . . . . . . . . . . . . . . . . 3,759 17,209
1999. . . . . . . . . . . . . . . . . . . . 2,978 16,944
2000. . . . . . . . . . . . . . . . . . . . 2,036 16,203
2001. . . . . . . . . . . . . . . . . . . . 1,331 15,216
Later . . . . . . . . . . . . . . . . . . . 1,274 165,798
------- --------
$15,449 $248,430
------- --------
------- --------
1995 1996
------- --------
NET INVESTMENT IN DIRECT FINANCING
LEASES AT DECEMBER 31:
Minimum future lease receipts . . . . . . . $19,778 $ 15,449
Estimated unguaranteed residual values. . . 7,562 7,437
Unearned amount representing interest . . . (7,969) (5,781)
------- --------
$19,371 $ 17,105
------- --------
------- --------
Year Ended December 31,
-----------------------------
1994 1995 1996
------ ------ -------
RENTAL INCOME:
Minimum rental income . . . . . $3,062 $3,584 $11,022
Contingent rental income. . . . 3,278 3,956 5,324
------ ------ -------
$6,340 $7,540 $16,346
------ ------ -------
------ ------ -------
F-28
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
If Burger King properties are not adequately maintained during the term of
the tenant leases, of which there are 173, such properties may have to be
rebuilt before the leases can be renewed, either by the Company as it considers
necessary or pursuant to Burger King's successor policy. The successor policy,
which is subject to change from time to time in Burger King's discretion, is
intended to encourage the reconstruction, expansion or other improvement of
older Burger King restaurants and generally affects properties that are more
than ten years old or are the subject of a franchise agreement that will expire
within five years.
Under the current operating partnership agreement, Burger King can require
that a restaurant property be rebuilt. If the tenant does not elect to
undertake the rebuilding, the Partnership would be required to make the required
improvement itself. However, as a condition to requiring the Partnership to
rebuild, Burger King would be required to pay the Partnership its percentage
share ("Burger King's Percentage Share") of the rebuilding costs. Such
percentage share would be equal to (i) the average franchise royalty fee
percentage rate payable to Burger King with respect to such restaurant, divided
by (ii) the aggregate of such average franchise royalty fee percentage rate and
the average percentage rate payable to the Partnership with respect to such
restaurant property. The Managing General Partner believes that Burger King's
Percentage Share would typically be 29% for a restaurant property.
The Managing General Partner believes it is unlikely that any material
amount of rebuilding of Burger King restaurant properties will be required in
the next several years, if ever.
The Company believes that improving, expanding, rebuilding or replacing its
restaurant properties from time to time is important. In addition to normal
maintenance and repair requirements, each franchisee is required under BKC's
franchise agreement and lease/sublease, at its own cost and expense, to make
such alterations to a Burger King restaurant as may be reasonably required by
BKC from time to time to modify the appearance of the restaurant to reflect the
then current image requirements for Burger King restaurants. Most of the
properties that are operating as Burger King restaurants are 15 to 20 years old.
The Company believes that many of these properties require substantial
improvements to maximize sales and that their condition is below BKC's current
image requirements.
To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the end
of the lease term and enhance the value of the underlying property to the
Company. As a result of this program, the Company has extended the lease term
for 31 leases/subleases as a result of remodel grants and lease riders. Two
leases were renewed with loans. During 1996, the Company paid remodeling costs
of $1,118 in conjunction with this program.
F-29
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
The land at 79 restaurant properties and the land and buildings at 14
restaurant properties are leased by the Company from third party lessors. The
building portions of the leases are generally capital leases while the land
portions are operating leases. These leases provide for an original term of 20
years and most are renewable at the Company's option. As of December 31, 1996,
the remaining lease terms (excluding renewal option terms) ranged from 1 to 15
years. If all renewal options are taken into account, the terms ranged from 5
to 35 years. Rents payable may escalate during the original lease and renewal
terms. For nine properties, the leases provide for contingent rent based on
each restaurant's sales.
Capital Operating
Leases Leases
------- ---------
MINIMUM FUTURE LEASE OBLIGATIONS FOR
YEARS ENDING DECEMBER 31:
1997. . . . . . . . . . . . . . $199 $ 2,103
1998. . . . . . . . . . . . . . 140 2,145
1999. . . . . . . . . . . . . . 60 1,930
2000. . . . . . . . . . . . . . 4 1,675
2001. . . . . . . . . . . . . . 1 1,248
Later . . . . . . . . . . . . . -- 3,530
---- -------
Total minimum obligations (a). . . . 404 $12,631
-------
-------
Amount representing interest . . . . (42)
----
Present value of minimum obligations $362
----
----
- --------------------
(a) Minimum Lease Obligations have not been reduced by minimum sublease
rentals.
Year Ended December 31,
---------------------------
1994 1995 1996
------ ------ ------
RENTAL EXPENSE
Minimum rental expense . . . . . $1,246 $1,304 $1,992
Contingent rental expense. . . . 102 101 88
------ ------ ------
$1,348 $1,405 $2,080
------ ------ ------
------ ------ ------
On July 21, 1995, the Managing General Partner authorized the
Partnership to repurchase up to 300,000 of its units in the open market.
Through December 31, 1996, the Partnership repurchased 30,000 Units for
$547,000. No further repurchases have been made or are contemplated.
During 1996, the Company agreed to make available to USRP Development
Company a revolving line of credit in the principal amount of $5,000, to be
used solely for paying for the acquisition and development of restaurant
properties which will be purchased by the Company upon completion of the
development. The line of credit is secured by certain
F-30
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
development properties and bears interest at an annual rate of 9%. The line
of credit is payable in monthly installments beginning July 1997 and matures in
October 2001. At December 31, 1996, the outstanding balance was $1,414 and is
included in Notes Receivable - related parties.
10. RECONCILIATION OF FINANCIAL REPORTING INCOME TO TAXABLE INCOME
Financial reporting income differs from taxable income primarily because
generally accepted accounting principles reflect the building portion of leases
from the Company to franchisees as a net investment in direct financing leases.
For tax purposes, these leases are treated as operating leases. In addition,
differences exist in depreciation methods and asset lives, and in the accounting
for escalating rents.
Financial
Reporting Reconciling Taxable
Income Differences Income
--------- ----------- -------
REVENUES FROM LEASED PROPERTIES:
Rental income . . . . . . . . . . . . . . . . $16,346 $ 3,485 $19,831
Amortization of unearned income on direct
financing leases . . . . . . . . . . . . . . 1,978 (1,978) -
------- ------- -------
18,324 1,507 19,831
------- ------- -------
EXPENSES:
Rent. . . . . . . . . . . . . . . . . . . . . $ 2,080 $ 192 $ 2,272
Depreciation and amortization . . . . . . . . 3,978 1,242 5,220
General and administrative. . . . . . . . . . 2,461 2,461
Interest expense (income), net. . . . . . . . 2,364 (47) 2,317
------- ------- -------
10,883 1,387 12,270
Gain on sale of properties and equipment. . . 32 28 60
------- ------- -------
Net income. . . . . . . . . . . . . . . . . . $ 7,473 $ 148 $ 7,621
------- ------- -------
------- ------- -------
F-31
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS
The Managing General Partner is responsible for managing the business and
affairs of the Company. The Company pays the Managing General Partner a
non-accountable annual allowance (adjusted annually to reflect increases in the
Consumer Price Index and additions to the property portfolio), plus
reimbursement of out-of-pocket costs incurred to other parties for services
rendered to the Partnerships. The allowance for the years ended December 31,
1994, 1995 and 1996, was $542, $585 and $1,175, respectively. The Partnerships'
accounts payable balance includes $136, $187 and $416 for this allowance as of
December 31, 1994, 1995 and 1996, respectively The Managing General Partner paid
no out-of-pocket costs to other parties on behalf of the Partnerships during
1994, 1995, and 1996.
To compensate the Managing General Partner for its efforts and increased
internal expenses with respect to additional properties, the Partnership pays
the Managing General Partner, with respect to each additional property purchased
(i) a one-time acquisition fee equal to one percent of the purchase price for
such property and (ii) an annual fee equal to one percent of the purchase price
for such property, adjusted for increases in the Consumer Price Index. For 1995
and 1996, the one-time acquisition fee equaled $109 and $1,043, respectively,
which was capitalized, and the increase in the non-accountable annual fee
equaled $29 and $495, respectively. In addition, if the Rate of Return (as
defined) on the Partnership's equity in all additional properties exceeds 12%
per annum for any fiscal year, the Managing General Partner will be paid an
additional fee equal to 25% of the cash flow received with respect to such
additional properties in excess of the cash flow representing a 12% Rate of
Return thereon. For 1996 this additional fee equaled $93 and there was no fee
paid in 1994 and 1995. However, to the extent such distributions are ultimately
received by the Managing General Partner in excess of those provided by its
1.98% Partnership interest, they will reduce the fee payable with respect to
such excess cash flow from any additional properties.
In 1994, the Partnerships with the consent and financial participation of
BKC, continued rent relief for three properties.
The Managing General Partner has agreed to make available to the
Partnership an unsecured, interest-free, revolving line of credit in the
principal amount of $500 to provide the Company with the necessary working
capital to minimize or avoid seasonal fluctuation in the amount of quarterly
cash distributions. No loans were made or were outstanding at any time during
the years ended December 31, 1994, 1995 and 1996.
A note receivable of $255 and $267 is due from Arkansas Restaurants #10
L.P. (Arkansas) at December 31, 1995 and 1996, respectively. The note
receivable is due on September 1, 1997, and has an interest rate of 9.0% per
annum. At December 31, 1996, tenant and other receivables from Arkansas were
$63. In addition, during 1996 the Company paid remodel costs of $443 on behalf
of Arkansas for three restaurants operated by Arkansas under
F-32
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
the Company's early-renewal program (see Note 8). The Managing General Partner
of Arkansas Restaurants #10 L.P. is owned by an officer of the Partnership's
Managing General Partner but receives no compensation for its services.
As of December 31, 1996, notes receivable of $920 are due from Southeast
Fast Food Partners, L.P. (SFF). The notes receivable are due on July 1, 1997
($57) and July 1, 1999 ($863) and have an interest rate of 9.0% per annum. As
of December 31, 1996, a note receivable of $136 is due from the owners of SFF.
This note receivables is due on July 1, 1999 and has an interest rate of 9.0%
per annum. At December 31, 1996, tenant and other receivables from SFF were
$125. In addition, during 1996, the Company incurred remodeling costs of $180
on behalf of SFF for restaurants operated by SFF under the Company's early
renewal program (See Note 8). These remodeling costs are included in
accounts payable at December 31, 1996. The Managing General Partner of
Southeast Fast Food Partners, L.P. is owned by an officer of the Partnership's
Managing General Partner.
On July 30, 1996, the Company completed a sale/leaseback transaction with
Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a director of the
Managing General Partner.
12. DISTRIBUTIONS AND ALLOCATIONS
Under the amended partnership agreements, cash flow from operations of the
Partnerships each year will be distributed 98.02% to the unitholders and 1.98%
to the general partners until the unitholders have received a 12% simple
(noncumulative) annual return for such year on the unrecovered capital per unit
($20.00 per unit, reduced by any prior distributions of net proceeds of capital
transactions); then any cash flow for such year will be distributed 75.25% to
the unitholders and 24.75% to the general partners until the unitholders have
received a total simple (noncumulative) annual return for such year of 17.5% on
the unrecovered capital per unit; and then any excess cash flow for such year
will be distributed 60.40% to the unitholders and 39.60% to the general
partners. The unitholders received 98.02% of all cash flow distributions for
1996 and 1995 and 98% for 1994.
Under the amended partnership agreements, net proceeds from capital
transactions (for example, disposition of the Properties) will be distributed
98.02% to the unitholders and 1.98% to the general partners until the
unitholders have received an amount equal to the unrecovered capital per unit
plus 12.0% cumulative, simple return on the unrecovered capital per unit
outstanding from time to time (to the extent not previously received from
distribution of cash flow or proceeds of prior capital transactions); then such
proceeds will be distributed 75.25% to the unitholders and 24.75% to the general
partners until the unitholders have received the total
F-33
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DISTRIBUTIONS AND ALLOCATIONS (CONTINUED)
cumulative, simple return of 17.5% on the unrecovered capital per unit; and then
such proceeds will be distributed 60.40% to the unitholders and 39.60% to the
general partners. There were no capital transactions in 1995 or 1994. The
deferred gain on disposition of property recorded in 1996 will be distributed
upon the recognition of the gain by the Company.
All operating income and loss of the Partnership for each year generally
will be allocated among the partners in the same aggregate ratio as cash flow is
distributed for that year. Gain and loss from a capital transaction generally
will be allocated among the partners in the same aggregate ratio as proceeds of
the capital transactions are distributed except to the extent necessary to
reflect capital account adjustments.
13. SUMMARY BY QUARTER (UNAUDITED)
Per Unit
-------------------------
Allocable Cash Related
Revenues Net Income Net Income Distributions
-------- ---------- ---------- -------------
1994
First quarter . . . . . . . $ 1,984 $1,100 $0.23 $0.39
Second quarter. . . . . . . 2,297 1,341 0.28 0.39
Third quarter . . . . . . . 2,330 1,392 0.29 0.41
Fourth quarter. . . . . . . 2,182 1,100 0.24 0.42
------- ------ ----- -----
Annual. . . . . . . . . . . $ 8,793 $4,933 $1.04 $1.61
------- ------ ----- -----
------- ------ ----- -----
1995
First quarter . . . . . . . $ 2,123 $1,090 $0.23 $0.42
Second quarter. . . . . . . 2,495 1,407 0.30 0.42
Third quarter . . . . . . . 2,592 1,496 0.32 0.43
Fourth quarter. . . . . . . 2,570 1,230 0.25 0.44
------- ------ ----- -----
Annual. . . . . . . . . . . $ 9,780 $5,223 $1.10 $1.71
------- ------ ----- -----
------- ------ ----- -----
1996
First quarter . . . . . . . $ 2,955 $1,323 $0.26 $0.47
Second quarter. . . . . . . 4,309 1,862 0.33 0.48
Third quarter . . . . . . . 5,748 2,590 0.36 0.485
Fourth quarter. . . . . . . 5,312 1,698 0.25 0.50
------- ------ ----- -----
Annual. . . . . . . . . . . $18,324 $7,473 $1.20 $1.94
------- ------ ----- -----
------- ------ ----- -----
- -------------------------
* Represents amounts declared and paid in the following quarter.
F-34
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. PRO FORMA (UNAUDITED)
The following pro forma information was prepared by adjusting the actual
consolidated results of the Company for the years ended December 31, 1995 and
1996 for the effects of:
a. the purchase of 184 restaurant properties on various dates during 1996
for an aggregate purchase price of $105,336 including the value of
384,836 Partnership Units issued to sellers and other related
financing transactions including the sale of 1,800,000 Partnership
Units in June 1996; and
b. the purchase of 16 restaurant properties on various dates from March
1995 through December 1995 for an aggregate purchase price of $10,963
including the value of 54,167 Partnership Units issued to sellers and
other related financing transactions as if all such transactions had
occurred as of January 1, 1995. Interest expense for pro forma
purposes was calculated assuming interest rates of 7.5% and 7.2% per
annum for 1995 and 1996, respectively, which approximates the rates
the Company paid during such periods.
These proforma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
restaurant properties were acquired as of January 1, 1995 and they do not
purport to represent the results of operations for future periods.
Year Ended December 31,
-----------------------
1995 1996
------- -------
Revenues from leased properties $25,439 $25,685
Net income 9,533 9,610
------- -------
------- -------
Net income allocable to unitholders 9,344 9,419
------- -------
------- -------
Average number of outstanding units 6,973 6,898
------- -------
------- -------
Net income per unit $ 1.34 $ 1.37
------- -------
------- -------
F-35
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED)
In January and February 1997 the Company acquired six properties in four
separate transactions. The total purchase price approximated $2,556 in cash.
Among the restaurant properties acquired were two Arby's, two Pizza Huts and two
Schlotzky's.
On January 29, 1997, a distribution of $0.50 per Partnership Unit was
declared. The date of record was March 6, 1997, and the distribution date was
March 13, 1997.
On February 7, 1997, a proxy statement for an exchange offer and
registration statement was filed with the Securities and Exchange Commission.
This filing pertains to an exchange of restaurant properties for Partnership
Units. This exchange is currently valued at $7,850.
On February 7, 1997, a proxy and registration statement, Form S-4, was
filed with the Securities and Exchange Commission regarding the conversion of
U.S. Restaurant Properties Master L.P. to a real estate investment trust entity.
On February 26, 1997, the Company issued $40,000 in debt which consist of
$12,500 Series A Senior Secured Guaranteed Notes with an 8.06% interest rate and
a due date of January 31, 2000; and $27,500 Series B Senior Secured Guaranteed
Notes with an 8.30% interest rate and due date of January 31, 2002. The
proceeds were primarily utilized to reduce the amount outstanding under the line
of credit and to improve the Company's cash position. The debt is
collateralized by substantially all the assets of the Company.
From March 1, 1997 through March 19, 1997, the Company has acquired 18
properties. The total purchase price approximated $12,800 which included
118,579 Partnership Units. The 18 properties included 16 Bruegger's Bagels
restaurant properties and two regional named restaurant properties.
On March 19, 1997, the Company had 130 restaurant properties under contract
for acquisition. Such properties represent 19 separate transactions in various
stages of negotiation and due diligence. These acquisitions represent an
aggregate consideration of approximately $72,000. These properties include 76
Arby's restaurant properties, six Pizza Hut restaurant properties, four Hardee's
restaurant properties, two Schlotzsky's restaurant properties, two Wendy's
restaurant properties, one Bruegger's Bagels restaurant property and 39 other
restaurant properties operated under other trade names.
DA970230255
042997 v46
378:17207-2
F-36
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of _______________, 1997 (the
"Agreement"), by and among U.S. RESTAURANT PROPERTIES MASTER L.P., a Delaware
limited partnership (the "Partnership"); U.S. RESTAURANT PROPERTIES, INC., a
Maryland corporation (the "Company"); USRP ACQUISITION, L.P., a Delaware
partnership and an indirectly wholly-owned subsidiary of the Company (the
"Acquisition Subsidiary"); USRP MANAGING, INC., a Delaware corporation and
wholly-owned subsidiary to the Company and general partner of the Acquisition
Subsidiary (the "General Partner") and QSV PROPERTIES, INC., a Delaware
corporation and the managing general partner of the Partnership ("QSV").
RECITALS
WHEREAS, Boards of Directors of QSV and of the Company have determined
that it is in the best interests of the Partnership and the Company,
respectively, to effect the merger provided for herein (the "Merger") upon the
terms and subject to the conditions set forth herein;
WHEREAS, the Company will have ownership rights in the assets of the
Partnership pursuant to this Agreement, and in accordance therewith, the
Company has caused to be formed and organized the General Partner and the
Acquisition Subsidiary; and
WHEREAS, all partnership and corporate action, as applicable, on the part
of the parties hereto necessary to authorize the execution of this Agreement
has been duly taken.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and agreements contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. THE MERGER; EFFECTIVE TIME
1.1 THE MERGER. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.2 hereof), in order to effect
the Merger, the Acquisition Subsidiary shall be merged with and into the
Partnership and the separate existence of the Acquisition Subsidiary shall
thereupon cease. The Partnership shall be the surviving entity in the Merger
(sometimes hereinafter referred to as the "Surviving Entity"), the General
Partner will be substituted as managing general partner of the Partnership and,
as a result, the Partnership shall become an indirectly wholly-owned subsidiary
of the Company and shall continue to be governed by the laws of the State of
Delaware. The separate existence of the Partnership with all its rights,
privileges, immunities, powers and franchises shall continue unaffected by the
Merger. The Merger shall be pursuant to the provisions of and shall have the
effect provided in the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA").
A-1
<PAGE>
1.2 EFFECTIVE TIME. Provided that this Agreement has not been terminated
or abandoned pursuant to Section 9 hereof, on the first business day following
the date on which the last to be fulfilled or waived of the conditions set
forth in Section 8 hereof shall be fulfilled or waived, or on such later date
as the Partnership and the Company may agree, a certificate of merger (the
"Certificate of Merger") with respect to the transactions contemplated hereby
shall be executed, acknowledged and filed with the Secretary of State of the
State of Delaware as provided in Section 211 of the Delaware RULPA and the
Merger provided for herein shall become effective at 11:59 p.m. on the date of
such filing or such other time and date as is set forth in the Certificate of
Merger (the "Effective Time").
2. PARTNERSHIP AGREEMENT OF THE SURVIVING ENTITY
The partnership agreement of the Partnership in effect at the Effective
Time shall be the partnership agreement of the Surviving Entity, until duly
amended in accordance with the terms thereof and the Delaware RULPA.
3. EFFECT OF THE MERGER ON PARTNERSHIP INTERESTS
3.1 EFFECT ON PARTNERSHIP INTERESTS. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any partnership
interest in the Partnership or the Acquiring Subsidiary:
(a) Each unit representing an assignment of limited partnership
interest in the Partnership (the "Units") issued and outstanding
immediately prior to the Effective Time (an aggregate of 7,012,585 Units)
shall be exchanged for and converted into one validly issued, fully paid
and nonassessable share of common stock, par value $.01 per share, of the
Company (the "Common Stock") (or an aggregate of 7,012,585 shares). Each
certificate representing any such Units (the "Certificates") outstanding
immediately prior to the Effective Date shall thereafter represent the
right to receive a certificate representing a like number of shares of
Common Stock. All Units shall no longer be outstanding and shall be
cancelled and returned and shall cease to exist;
(b) QSV's 1% Percentage Interest, as defined in the Third Amended
and Restated Agreement of Limited Partnership of the Partnership dated as
of __________________, 1997 (the "Partnership Agreement"), shall be
exchanged for and converted into 70,834 shares of Common Stock and the
right to receive a certificate representing such Common Stock.
3.2 EXCHANGE OF UNITS FOR COMPANY SHARES.
(a) EXCHANGE AGENT. As of the Effective Time, the Company shall
deposit with American Stock Transfer & Trust Company (the "Exchange
Agent"), for the benefit of holders of Units ("Unitholders"), for exchange
in accordance with this Section 3, certificates representing the shares of
Common Stock to be issued pursuant to Section 3.1 in exchange for
outstanding Units.
A-2
<PAGE>
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the
Surviving Entity shall cause the Exchange Agent to mail to each Unitholder
of record (i) a letter of transmittal, which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent, in
such form and including such other provisions as the Company may specify
and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing Company Shares.
Upon surrender of a Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly executed, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing a number of shares of Common Stock equal to the
number of Units represented by the Certificate, the Certificate, and the
Certificate so surrendered shall forthwith be cancelled. Declared but
unpaid distributions on Units and partnership interests outstanding as of
the applicable record date shall be the obligation of the Company and the
Company hereby agrees to pay such distributions on the payment date
specified in the resolutions of QSV authorizing such distributions. No
interest will be paid or accrued on unpaid distributions, if any, payable
to holders of Certificates. In the event of a transfer of ownership of
Units which is not registered in the transfer records of the Partnership,
a certificate representing the proper number of shares of Common Stock may
be issued to the transferee if the Certificate representing such Units is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable
transfer taxes have been paid. If any certificate for shares of Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition to
such exchange that the person requesting such exchange (i) pay any
transfer or other taxes required by reason of the exchange of certificates
of shares of Common Stock in a name other than that of the registered
holder of the Certificate surrendered or (ii) establish to the
satisfaction of the Company that such taxes have been paid or are not
applicable.
(c) TRANSFERS. After the Effective Time, there shall be no
transfers on the transfer books of the Partnership of the Units which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Company for transfer,
they shall be cancelled and exchanged for the number of shares of Common
Stock deliverable in respect thereof pursuant to this Agreement in
accordance with the procedures set forth in this Section 3.
(d) NO LIABILITY. In the event any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and,
if required by the Company, the posting by such person of a bond in such
amount as the Company may direct as indemnity against any claim that may
be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate, a
certificate representing the shares of Common Stock deliverable in respect
thereof pursuant to this Agreement.
A-3
<PAGE>
4. EFFECT OF MERGER ON PARTNERSHIP INTERESTS IN ACQUIRING SUBSIDIARY
OUTSTANDING PRIOR TO THE EFFECTIVE TIME
At the Effective Time, by virtue of the Merger, all partnership interests
in the Acquiring Subsidiary outstanding immediately prior thereto (all of
which, immediately prior to the Effective time, shall have been owned by the
Company and the General Partner shall continue to be outstanding as interests
in the Partnership.
5. REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE GENERAL PARTNER
AND THE ACQUISITION SUBSIDIARY. The Company, the General Partner and the
Acquisition Subsidiary hereby represent and warrant to the Partnership as
follows:
(a) The Company and the General Partner are corporations and the
Acquisition Subsidiary is a partnership duly formed, validly existing and
in good standing under the applicable laws of its state of organization.
(b) All action on the part of the Company, the General Partner and
the Acquisition Subsidiary and their respective officers, trustees,
directors, stockholders and partners, as applicable, necessary for the
authorization, execution and delivery of this Agreement, the performance
of all obligations of the Company, the General Partner and the Acquisition
Subsidiary hereunder and, in the case of the Company, the authorization,
issuance and delivery of the shares of Common Stock has been taken or will
be taken prior to the Effective Date, and this Agreement constitutes the
valid and legally binding obligation of each of the Company, the General
Partner and the Acquisition Subsidiary, enforceable against it in
accordance with its terms, except (i) as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditor's rights
generally and (ii) as enforceability may be limited by laws relating to
the availability of specific performance, injunctive relief or other
equitable remedies.
(c) Neither the Company, the General Partner nor the Acquisition
Subsidiary is in violation of or default under any provisions of its
articles or certificate of incorporation, bylaws or partnership agreement,
as applicable, or of any instrument, judgment, order, writ, decree or
contract to which, it is a party or by which it is bound or, in any
material respect, of any provision of any federal or state statute, rule
or regulation applicable to it. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time or the giving of notice,
either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any
lien, charge or encumbrance upon any assets of the Company, the General
Partner or the Acquisition Subsidiary.
A-4
<PAGE>
5.2 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP. The Partnership
hereby represents and warrants to the Company as follows:
(a) The Partnership is a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Delaware.
(b) All action on the part of the Partnership and its partners
necessary for the authorization, execution and delivery of this Agreement
and the performance of all obligations of the Partnership hereunder has
been taken or, subject to obtaining the approval of Unitholders holding a
majority of the outstanding Units, will be taken prior to the Effective
Date, and this Agreement constitutes the valid and legally binding
obligation of the Partnership, enforceable against it in accordance with
its terms, except (i) as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditor's rights generally
and (ii) as enforceability may be limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
(c) The Partnership is not in violation of or in default under any
provision of the Partnership Agreement or of any instrument, judgment,
order, writ, decree or contract to which it is a party or by which it is
bound or, in any material respect, of any provision of any Federal or
state statute, rule or regulation applicable to the Partnership. The
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in any such
violation or be in conflict with or constitute, with or without the
passage of time or the giving of notice, either a default under any such
provision, instrument, judgment, order, writ, decree or contract or an
event which results in the creation of any lien, charge or encumbrance
upon any of the assets of the Partnership.
6. COVENANTS
6.1 STOCK EXCHANGE LISTING. The Company shall use its best efforts to
obtain an approval to list on the New York Stock Exchange, Inc. ("NYSE") the
Common Stock to be issued in the Merger, subject to official notice of
issuance, prior to the Effective Time.
6.2 UNITHOLDER APPROVAL. The Partnership shall use its best efforts to
obtain the approval of this Agreement by Unitholders holding a majority of the
outstanding Units.
6.3 INDEMNIFICATION. Form and after the Effective Time, the Company
agrees that it will indemnify and hold harmless, and advance expenses to, QSV
and, as applicable, each officer, director, partner or other person controlling
the QSV, and any affiliate of it, against any costs or expenses (including
reasonable attorneys' fees), judgment, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to the transactions contemplated hereby, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent permitted by law. In addition, the Company hereby assumes the
Partnership's
A-5
<PAGE>
indemnity obligations under the Partnership Agreement with respect to
liabilities to the foregoing individuals and entities arising out of actions
or omissions occurring prior to the Effective Time.
7. CONDITIONS
7.1 CONDITIONS TO THE PARTNERSHIP'S OBLIGATION TO EFFECT THE MERGER. The
obligation of the Partnership to consummate the Merger is subject to
satisfaction of each of the following conditions:
(a) This Agreement shall have been duly approved by Unitholders
holding a majority of the Units outstanding as of _________________, 1997
(the "Record Date") in accordance with applicable law and the Partnership
Agreement;
(b) No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority, nor shall there be any order or
injunction of a United States or state court of competent jurisdiction in
effect, which prohibits the exchange of Units for shares of Common Stock
or the consummation of the Merger;
(c) The Partnership shall have received an opinion of counsel to the
effect that the Merger will be treated as part of a transaction described
in Section 351 of the Internal Revenue Code of 1986, as amended (the
"Code");
(d) The Partnership shall have received a favorable letter ruling
from the Internal Revenue Service as to treatment of the Merger as part of
a transaction described in Section 351 of the Code;
(e) The shares of Common Stock issuable to the Unitholders pursuant
to this Agreement shall have been approved for listing on the NYSE upon
official notice of issuance; and
(f) Amendments to the Partnership Agreement to permit, among other
things, the withdrawal of QSV as managing general partner of the
Partnership, shall have been duly approved by Unitholders holding a
majority of the Units outstanding as of the Record Date in accordance with
applicable law and the Partnership Agreement, and a certificate of
amendment effecting such amendments shall have been duly filed with the
Secretary of State of the State of Delaware.
7.2 CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT THE MERGER. The
obligation of the Company to consummate the Merger is subject to satisfaction
of the following conditions:
(a) No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority, nor shall there be any order or
injunction of a United States or state court of competent jurisdiction in
effect, which prohibits the exchange of the Units for Common Stock or
consummation of the Merger; and
A-6
<PAGE>
(b) The contribution of the management compensation rights of QSV
under the terms of the Partnership Agreement and the partnership agreement
of the Operating Partnership to the Operating Partnership shall have been
effected.
8. TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after approval by the Unitholders, by mutual written consent of the Company and
the Partnership.
8.2 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Section 8, no
party hereto (or any of its directors, trustees, officers or partners, or
persons otherwise controlling or affiliated with any of the parties hereto or
any of their directors, officers or partners) shall have any liability or
further obligation to any other party to this Agreement.
9. MISCELLANEOUS AND GENERAL
9.1 MODIFICATION OR AMENDMENT. Subject to the applicable provisions of
the Maryland General Corporation Law and the Delaware RULPA, at any time prior
to the Effective Time, the parties hereto may modify or amend this Agreement by
mutual written consent.
9.2 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same Agreement.
9.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
9.4 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.3,
this Agreement is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
9.5 CAPTIONS. The section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
9.6 NO LIABILITY. No trustee, beneficiary or stockholder of the Company
shall have any personal liability for any obligations of the Company under this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto as of the date first hereinabove written.
U.S. RESTAURANT PROPERTIES, INC.
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
USRP MANAGING, INC.
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
USRP ACQUISITION, L.P.
By: USRP Managing Inc., the General Partner
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
U.S. RESTAURANT PROPERTIES
MASTER L.P.
By: U.S. Restaurant Properties, Inc.,
the Managing General Partner
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
U.S. RESTAURANT PROPERTIES, INC.
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
A-8
<PAGE>
[MORGAN KEEGAN & COMPANY, INC.]
, 1997
-----------------
Special Committee of the Board of Directors of
U.S. Restaurant Properties, Inc.
5310 Harvest Hill Road
Suite 270
Dallas, Texas 75230
Attn: Gerald H. Graham
Eugene G. Taper
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the unitholders of U.S. Restaurant Properties Master L.P. (the
"Partnership") of the consideration to be paid by the Partnership to the
Managing General Partner of the Partnership (the "Management Company") in
connection the withdrawal by the Management Company as the general partner of
the Partnership and the amendment of the Partnership Agreement to terminate the
fees payable to the Management Company (the "Transaction"). Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to them
in the Withdrawal Agreement.
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with merges and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes. We have been retained by the Special
Committee of the Board of Directors of the Managing General Partner of the
Partnership (the "Special Committee") for the purpose of, and will receive a
fee for, rendering this opinion. We have not advised any party in connection
with the Transaction other than the Special Committee.
In connection with our opinion, we have (1) reviewed the Partnership
Agreements (and the proposed amendments thereto); (2) reviewed the Withdrawal
Agreement; (3) held discussions with various members of management and
representatives of the Partnership and the Management Company concerning each
company's historical and current operations, financial condition and prospects;
(4) reviewed internal financial analyses, financial and operating forecasts,
reports and other information prepared by officers and representatives of the
Partnership and the Management Company; (5) reviewed certain publicly-available
information with respect to certain other companies that we believe to be
comparable to the Management Company and the trading markets for such other
companies' securities; (6) reviewed certain publicly-available information
concerning the terms of certain other transactions that we deemed relevant to
our inquiry; and
B-1
<PAGE>
(7) conducted such other financial studies, analyses and investigations as we
deemed appropriate for the purposes of this opinion.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information publicly available or provided to us by the Partnership and the
Management Company. We have not been engaged to, and have not independently
attempted to, verify any of such information. We have also relied upon the
management of the Partnership and the Management Company as to the
reasonableness and achievability of the financial and operating projections and
the assumptions and bases therefor provided to us and, with your consent, we
have assumed that such projections and the assumptions and bases therefor
provided to us and, with your consent, we have assumed that such projections,
including and without limitation projected cost savings and operating synergies
from the Transaction, reflect the best currently available estimates and
judgments of such respective managements of the Partnership and the Management
Company and that such projections and forecasts will be realized in the amounts
and time periods currently estimated by the managements of the Partnership and
the Management Company. We have not been engaged to assess the achievability
of such projections or the assumptions on which they were based and express no
view as to such projections or assumptions. In addition, we have not conducted
a physical inspection or appraisal of any of the assets, properties or
facilities of either the Partnership or the Management Company nor have we been
furnished with any such evaluation or appraisal. We have also assumed that the
conditions to the Transaction as set forth in the Withdrawal Agreement would be
satisfied, and that the Transaction will be consummated on a timely basis and
in the manner contemplated in the Withdrawal Agreement. Our opinion is based
upon analyses of the foregoing factors in light of our assessment of general
economic, financial and market conditions as they exist and can be evaluated by
us as of the date hereof. We express no opinion as to the advisability of the
Conversion; the price or trading range at which the Partnership's units will
trade following the date hereof, or upon completion of the Transaction, or upon
completion of the Conversion to a real estate investment trust ("REIT").
Morgan Keegan has provided other investment banking services to the
Partnership, including acting as the lead managing underwriter of the
Partnership's public offering on June 12, 1996. An affiliate of Morgan Keegan
provided a $20 million mortgage warehouse facility to the Partnership in
exchange for interest payments on amounts outstanding thereunder at a rate of
300 basis points over LIBOR. This facility has been paid in full. In the
ordinary course of our business, we may trade the Partnership's units for our
own account and the accounts of our customers. Accordingly, we may at any time
hold long or short positions in the Partnership's units.
It is understood that this opinion is not to be quoted or referred to, in
whole or in part (including excerpts or summaries), in any filing, report,
document, release or other communication used in connection with the
Transaction (unless required to be quoted or referred to by applicable
regulatory requirements), nor shall this opinion be used for any other
purposes, without our prior written consent, which consent shall not be
unreasonably withheld. Furthermore, our opinion is directed to the Special
Committee of the Board of Directors and does not constitute a recommendation to
any unitholder of the Partnership as to how such unitholder should vote at the
special meeting held in connection with the Transaction.
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Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
consideration paid to the Management Company pursuant to the Transaction is
fair, from a financial point of view, to the unitholders of the Partnership.
Yours very truly,
MORGAN KEEGAN & COMPANY, INC.
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APPENDIX C
MATERIAL AMENDMENTS
TO MASTER PARTNERSHIP AGREEMENT
OTHER RESTAURANT PROPERTIES: Those certain properties for which food sales
account for 10% or more of the gross revenues generated by the improvements on
such properties (a) properties (regardless of use) acquired adjacent to such
properties or acquired in conjunction with the use or ownership of such
properties, (b) properties that were formerly such type of properties which are
not currently being used for any purpose, and (c) any unimproved land which is
adjacent to such a property or on which such a property is reasonably expected
to be constructed within one (1) year following the date of acquisition of such
land, in any case in which the Partnership, the REIT or any Affiliate or either
of them has acquired or acquires an interest, whether consisting of land to be
held in fee simple or as a leasehold and any improvements thereon (including
all real property and certain personal property associated therewith), together
with (i) any other properties acquired pursuant to Section 7.2(v) with respect
to such properties, (ii) any properties adjacent to such properties, (iii) any
buildings, improvements or other structures situated on such properties, and
(iv) any further right, title or interest acquired in such properties. "Other
Restaurant Property" means any one of the Other Restaurant Properties.
RETAIL PROPERTIES: Those certain properties, other than Other Restaurant
Properties and Restricted Restaurant Properties, for which the sales of goods
or services to the public account for substantially all of the gross revenues
generated by the improvements on such properties and (a) properties (regardless
of use) acquired adjacent to such properties or acquired in conjunction with
the use or ownership of such properties, (b) properties that were formerly such
type of properties which are not currently being used for any purpose, and (c)
any unimproved land which is adjacent to such a property or on which such a
property is reasonably expected to be constructed within one (1) year following
the date of acquisition of such land, in any case in which the Partnership, the
REIT or any Affiliate of either of them has acquired or acquires an interest,
whether consisting of land to be held in fee simple or as a leasehold and any
improvements thereon (including all real property and certain personal property
associated therewith), together with (i) any other properties acquired pursuant
to Section 7.2(v) with respect to such properties, (ii) any properties adjacent
to such properties, (iii) any buildings, improvements or other structures
situated on such properties, and (iv) any further right, title or interest
acquired in such properties. "Retail Property" means any one of the Retail
Properties.
3.1 PURPOSES AND BUSINESS.
The purposes of the Partnership shall be (a) to invest in, acquire, own,
hold a leasehold interest in, manage, maintain, operate, lease, sublease,
improve, finance, reconstruct, sell, exchange, franchise and otherwise dispose
of Partnership Properties and Ancillary Property, whether through the Operating
Partnership, other Persons or otherwise; (b) originate loans secured by liens
on real estate; (c) in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership as the limited partner in the Operating
Partnership pursuant to the Operating Partnership Agreement; and (d) to enter
into any lawful transaction and engage in any lawful activities in furtherance
of the foregoing purposes. The Partnership shall not engage in
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any business or activity except as set forth above without the written
consent of the General Partner and a Majority Vote of the Limited Partners.
3.2 POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to, or convenient for the
furtherance and accomplishment of the purposes and business described herein
and for the protection and benefit of the Partnership, including, without
limitation, the following:
* * *
(h) To originate loans secured by liens on real estate.
5.14 EXCHANGE OF UNITS.
(a) Subject to Section 5.14(b), on or after the date on which the Units
are no longer listed for trading on a National Securities Exchange (the
"Delisted Date"), each Limited Partner shall have the right (the "Exchange
Right") to require the REIT to acquire all or a portion of the Units held by
such Limited Partner in exchange for the REIT Stock Amount. The Exchange Right
shall be exercised pursuant to a Notice of Exchange delivered to the REIT (with
a copy to the Partnership) by the Limited Partner who is exercising the
Exchange Right (the "Exchanging Partner"). Notwithstanding anything herein to
the contrary, no Unit may be sold, pledged, hypothecated or otherwise
transferred to any Person (other than an Immediate Family member) unless, prior
to such transfer, such Unit is exchanged for shares of Common Stock pursuant to
the terms of this Section 5.14. A Limited Partner may not exercise the
Exchange Right for fewer than one hundred (100) Units or, if such Limited
Partner holds fewer than one hundred (100) Units, all of the Units held by such
Partner. The Exchanging Partner shall have no right, with respect to any
Partnership Units so exchanged, to receive any distributions paid with respect
to the Partnership Units on or after the date of the Notice of Exchange. The
Assignee of any Limited Partner may exercise the rights of such Limited Partner
pursuant to this Section 5.14(a), and such Limited Partner shall be deemed to
have assigned such rights to such Assignee and shall be bound by the exercise
of such rights by such Assignee. In connection with any exercise of such
rights by an Assignee on behalf of a Limited Partner, the REIT Stock Amount
shall be paid by the REIT directly to such Assignee and not to such Limited
Partner.
(b) Notwithstanding the provisions of Section 5.14(a), a Partner shall
not be entitled to exercise the Exchange Right pursuant to Section 5.14(a) if
the delivery of shares of Common Stock to such Partner by the REIT pursuant to
Section 5.14(a) would be prohibited under the Amended Articles of Incorporation
of the REIT.
7.2 POWERS OF MANAGING GENERAL PARTNER.
Subject to the limitation of Section 7.3, which vests certain voting
rights in the Limited Partners, and to the limitations and restrictions set
forth in Article VIII, the Managing General Partner (acting on behalf of the
Partnership and the Operating Partnership) shall have the right, power, and
authority, in the management of the business and affairs of the Partnership and
Operating Partnership, to do or cause to be done any and all acts, at the
expense of the
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Partnership or Operating Partnership, as the case may be, deemed by the
Managing General Partner to be necessary or appropriate to effectuate the
business, purposes, and objectives of the Partnership and the Operating
Partnership. The power and authority of the Managing General Partner
pursuant to this Agreement and the Operating Partnership Agreement shall be
liberally construed to encompass all acts and activities in which a
partnership may engage under the Delaware RULPA. The power and authority of
the Managing General Partner shall include, without limitation, the power and
authority on behalf of the Partnership and the Operating Partnership:
* * *
(n) To originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnership's underwriting criteria, which shall be
established by the Managing General Partner.
9.1 COMPENSATION TO GENERAL PARTNERS.
Except as permitted under Section 5.5 or expressly provided in Section 9.3
or 9.4, no General Partner shall receive any compensation from the Partnership
or the Operating Partnership for services rendered in its capacity as a general
partner of the Partnership or the Operating Partnership. Notwithstanding
anything herein to the contrary, at such time as QSV ceases to be the Managing
General Partner or the managing general partner of the Operating Partnership,
whether as a result of the transfer of QSV's Partnership Interest pursuant to
Section 12.2 (or Section 11.2 of the Operating Partnership Agreement) or the
withdrawal or removal of QSV pursuant to Section 14.1 or 14.2 (or Section 13.1
of the Operating Partnership Agreement) (other than removal for "cause"), then
QSV shall have the option, in its sole discretion, to convert its Partnership
Interest and its partnership interest in the Operating Partnership and to
either assign to the Partnership or convert its rights (the "Rights") under the
provisions of Section 9.3 (and Section 9.3 of the Operating Partnership
Agreement) (collectively, the "Conversion") for the Acquisition Price (as
defined below), effective as of the date of such transfer, withdrawal or
removal, and upon such Conversion, the successor Managing General Partner shall
cause the Partnership to issue to QSV Units, and the Partnership shall cause
the Operating Partnership to issue interests therein, in the aggregate amounts
provided for below.
In exchange for the Conversion of the Rights, as provided for above, and
the conversion of QSV's partnership interest in the Operating Partnership, in
the event QSV elects to effect the Conversion, QSV will receive the
"Acquisition Price," consisting of (a) the Initial Unit Consideration and (b)
the Contingent Unit Consideration. The Initial Unit Consideration consists of
850,000 Units and/or interests in the Operating Partnership (which number or
classification shall be adjusted to give effect to any reclassification or
change of the Units, including, without limitation, a split, or any merger or
consolidation of the Partnership, except the merger of the Partnership with the
REIT or a subsidiary thereof, or sale of assets to another entity, occurring
after March 31, 1997), which number of Units or interests in the Operating
Partnership shall be reduced (on a one-for-one basis) by the number of Units
received by QSV in connection with the conversion of its Partnership Interest
pursuant to the provisions of this Section 9.1. In connection with the
Conversion, QSV's Partnership Interest shall be converted into such number of
Units as at such time represents 1% of the then outstanding Units, after giving
effect to the conversion of QSV's Partnership Interest. The Initial Unit
Consideration, including the number of Units issuable upon the conversion of
QSV's Partnership Interest, shall be issued by the
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Partnership, and the Partnership shall cause the Operating Partnership to
issue its interests, as soon as practicable following the date of the
Conversion, but in no event no later than 30 days thereafter.
The Contingent Share Consideration consists of up to a maximum number of
550,000 Units and/or interests in the Operating Partnership (which number or
classification shall be adjusted to give effect to any reclassification or
change in the Common Stock or the Units, including, without limitation, a
split, or any merger or consolidation of the REIT or the Partnership, except
the merger of the Partnership with the REIT or any subsidiary thereof, or sale
of assets to another entity, occurring after March 31, 1997). The type and
number of securities issuable as the Contingent Share Consideration (subject to
the next sentence) shall be at the sole discretion of QSV. The exact number of
Units and/or interests in the Operating Partnership to be issued will be
determined by the dividing (i) the amount by which the MGP Net Income (as
defined below) for the 2000 Fiscal Year exceeds $3,612,500 by (ii) $4.25 and
rounding the resulting number up to the nearest whole number. "MGP Net Income"
means the dollar amount which would have been payable to QSV, as Managing
General Partner and as managing general partner of the Operating Partnership,
by the Partnership and Operating Partnership for the 2000 Fiscal Year, pursuant
to the Rights, had QSV operated the Partnership and the Operating Partnership
on a continuous basis from the date of the Conversion to December 31, 2000 plus
the amounts that have been payable to QSV pursuant to its aggregate 1.98%
general partnership interest in the Partnership and the Operating Partnership,
less $775,000.
For example, if the MGP Net Income for the 2000 Fiscal Year would have
been $5,100,000 ($5,875,000 of revenues less $775,000) then the Contingent Unit
Consideration would be an additional 350,000 Units and/or interests in the
Operating Partnership.
The Contingent Unit Consideration, if any, shall be issued by the
Partnership, and the Partnership shall cause the Operating Partnership to so
issue any such consideration, as soon as practicable following the end of the
2000 Fiscal Year, but in no event later than March 31, 2001.
9.3 OPERATIONAL EXPENSES.
In addition to any reimbursement pursuant to the indemnification set forth
in Section 7.10, the Partnership shall cause the Operating Partnership,
pursuant to Section 9.3 of the Operating Partnership Agreement, to pay the
following:
(a) With respect to (i) the Partnership Properties held as of March
17, 1995 and (ii) the Partnership Properties and Ancillary Property
related thereto acquired thereafter with respect to the Partnership
Properties referred to in clause (i) above whether pursuant to Section
8.12 or otherwise, the Partnership shall cause to be paid to the Managing
General Partner with respect to each Fiscal Year an aggregate amount equal
to Four Hundred Thousand Dollars ($400,000) adjusted annually as set forth
in Section 9.3(c), which amount shall be in lieu of any reimbursement for
expenses related to the management of the business affairs of the
Partnership and the Operating Partnership (other than expenses described
in clause (c) hereof) that are incurred by the Managing General Partner or
its Affiliates with respect to such Partnership Properties, which amount
shall be payable in equal quarterly installments within sixty (60) days
after the end of each fiscal quarter.
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(b) With respect to any Partnership Property and Ancillary Property
related thereto acquired after March 17, 1995 (other than those referred
to in clause (a) above) and mortgage loans, if any, originated by the
Partnership or the Operating Partnership, (i) the Partnership shall cause
to be paid to the Managing General Partner (A) fee equal to 1% of the
purchase price paid by the Partnership or the Operating Partnership for
such Partnership Property and Ancillary Property related thereto, payable
on the date of acquisition or origination, as applicable, and (B) with
respect to each Fiscal Year, an amount, adjusted annually as set forth in
the next paragraph below, accruing while such property is held at the rate
of 1% per annum (applied using the simple interest method on the basis of
a 365/366-day year and the actual number of days elapsed) on the purchase
price paid by the Partnership or the Operating Partnership for such
Partnership Property and Ancillary Property related thereto, and (ii) if
the Rate of Return attributable to all Partnership Properties and
Ancillary Property related thereto acquired after March 17, 1995 (other
than those referred to in clause (a) above) in respect of any Fiscal Year
shall exceed 12% per annum, the Partnership shall cause to be paid to the
Managing General Partner an amount equal to 25% of the amount of cash
received by the Operating Partnership representing such excess, which
amounts shall be in lieu of any reimbursement of expenses related to the
management of the business affairs of the Partnership and the Operating
Partnership (other than expenses described in clause (c) hereof) that are
incurred by the Managing General Partner or its Affiliates with respect to
such Partnership Properties and (except as provided in clause (i)(A) of
this clause (b)) shall be payable in quarterly installments within sixty
(60) days after the end of each fiscal quarter (which may be estimated in
the case of the first three fiscal quarters); provided that there shall be
credited against the amounts, if any, payable pursuant to clause (ii) of
this clause (b) in respect of any Fiscal Year amounts payable to the
Managing General Partner in respect of its First Tier Residual Interest or
Second-Tier Residual Interest pursuant to Sections 6.5 and 6.6 in respect
of such Fiscal Year. For purposes of the calculations provided for in
this Section 9.3, in the event of a mortgage loan origination, the term
"Partnership Properties" shall be deemed to include any originated
mortgage loans and the "purchase price" of such mortgage loans will be the
principal balances thereof at the beginning of any Fiscal Year.
(c) The Partnership shall either cause to be paid to the Managing
General Partner on a monthly basis, or cause the Managing General Partner
to be reimbursed for the payment of, all amounts payable to any Person for
providing goods or performing services (including, without limitation,
legal, accounting, auditing, record keeping, reporting, depositary,
transfer agent, printing, appraisal, servicing and consulting services)
for or on behalf of the Partnership or the Operating Partnership;
provided, however, that the Operating Partnership shall not cause to be
paid to the Managing General Partner, or cause the Managing General
Partner to be reimbursed, for the payment of any amount to an Affiliate or
an officer, director, or employee of an Affiliate for legal, accounting,
managerial, or consulting services; and provided further, that the
Operating Partnership shall cause to be paid to, or shall cause the
Managing General Partner to be reimbursed for a payment to, an Affiliate
or an officer, director, or employee of an Affiliate for goods or other
services only if the price and the terms upon which such goods or services
are provided to the Partnership or the Operating Partnership are fair to
the Partnership or the Operating Partnership, as the case may be, and are
not less favorable to the Partnership or the Operating Partnership, as the
case may be, than would be incurred if the Partnership or the Operating
Partnership were to obtain such goods or services from an
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unrelated third party or were to engage employees to provide such goods or
services directly.
For 1987 and for each Fiscal Year thereafter, the amount payable pursuant
to Section 9.3(a) shall be increased by an amount equal to the product of Four
Hundred Thousand Dollars ($400,000) multiplied by the percentage increase in
the Price Index from January 1, 1986, through the last day of the immediately
preceding Fiscal Year. For each year after the year in which a Partnership
Property is acquired, the amount otherwise payable pursuant to Section
9.3(b)(i)(B) (the "Clause (b)(i)(B) Amount") shall be increased by an amount
equal to the product of the Clause (b)(i)(B) Amount multiplied by the
percentage increase in the Price Index from the first day of the immediately
preceding Fiscal Year or, in the case of the first year after the year in which
the Partnership Property is acquired, the first day of the month in which the
acquisition occurred through the last day of the Fiscal Year immediately
preceding such year or, if earlier, the last day of the month in which such
Partnership Property was disposed of. The percentage increase in the Price
Index through the last day of a particular period shall be determined by
calculating the increase, if any, in the Price Index for the last time period
during such period (the "Price Index Determination Period") with respect to
which the Price Index is published (currently a monthly period) over the Price
Index for the time period immediately preceding the first day of the Price
Index Determination Period, and expressing the amount of such increase as a
percentage of the Price Index for said time period immediately preceding the
first day of the Price Index Determination Period.
"RATE OF RETURN" in respect of any period shall mean and refer to the
quotient obtained by dividing (1) the aggregate revenues (calculated in
accordance with generally accepted accounting principles and before
amortization of unearned income on direct financing leases) received by the
Partnership or the Operating Partnership from the Partnership Properties and
Ancillary Property referred to in Section 9.3(b) above for such period, whether
through operations, sale or other disposition, less (without duplication) (i)
the aggregate fees payable pursuant to Section 9.3(b)(i)(B) for such period in
respect of such properties, (ii) the aggregate expenses of the Partnership
(other than interest expense, depreciation, amortization and other non-cash
expenses and charges, and expenses described in Sections 9.3(b) and (c)
directly attributable to such property and interest expense on any debt
allocated thereto for such period, (iii) the general and administrative
expenses of the Partnership (other than non-cash expenses and charges and
expenses described in clauses (a) and (b) above) for such period allocated to
such properties (based on the ratio of Average Partnership Equity in such
property to the aggregate Average Partnership Equity in all Partnership
Properties) and (iv) the principal amount of debt allocated to such properties
repaid during such period and, if applicable, the cash costs and expenses of
any Kind or nature incurred in respect of the sale or other disposition
thereof, by (2) the Average Partnership Equity in such property during such
period. "AVERAGE PARTNERSHIP EQUITY" shall mean and refer to (A) the average
of the sums of the aggregate purchase prices therefor, the aggregate fees paid
pursuant to Section 9.3(b)(i)(A) above in respect thereof and all other cash
costs and expenses of any kind or nature incurred in connection with the
acquisitions thereof ("Property Costs") as of the last day of each calendar
month occurring during the period of determination, less (B) the average
outstanding principal amount of debt of the Partnership outstanding as of the
last day of each calendar month during such period and allocated to such
properties. The Rate of Return for any outstanding mortgage loans will be
evaluated separately with the mortgage loans constituting a separate pool of
"properties" for such calculation. The general and administrative expenses
allocable to such mortgage loans shall be equal to the total
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amount of such expenses for any Fiscal Year multiplied by a fraction, the
numerator of which shall be the aggregate principal amount of all mortgage
loans outstanding at the beginning of such Fiscal Year and the denominator of
which shall be the total of all Property Costs and such aggregate principal
amount.
For the purposes of the foregoing, debt of the Partnership shall be
allocated among the Partnership Properties as follows: (1) non-recourse debt
shall be allocated to the property secured thereby and, if such debt is secured
by more than one property, such debt shall be allocated among the properties
secured thereby based on the relative Property Costs thereof-, and (2) recourse
debt shall be allocated to all of the Partnership Properties based on the
relative Property Costs thereof (reduced for this purpose by the amounts of
non-recourse debt allocated thereto in accordance with clause (1) above).
9.4 REIMBURSEMENT OF THE GENERAL PARTNERS.
In the event that the provisions of Section 9.3 are terminated in
accordance with the terms of Section 9.1, the following compensation provisions
shall apply, to be effective upon the date of such termination.
(a) The General Partners shall not be compensated for their services as
general partner of the Partnership except as provided in elsewhere in this
Agreement (including the provisions of Article VI regarding distributions,
payments and allocations to which it may be entitled in its capacity as the
General Partner).
(b) Subject to Section 9.4(c), the Partnership shall be liable for, and
shall reimburse the General Partners on a monthly basis, or such other basis as
the General Partners may determine in their sole and absolute discretion, for
all sums expended in connection with the Partnership's business or for the
benefit of the Partnership, including, without limitation, (i) expenses
relating to the ownership of interests in, and management and operation of, or
for the benefit of, the Partnership, (ii) compensation of officers and
employees, including, without limitation, payments under future employee
benefit plans of any General Partner, (iii) director fees and expenses, and
(iv) all costs and expenses of any General Partner being a public company,
including costs of filings with the Commission, reports and other distributions
to its stockholders.
(c) To the extent practicable, Partnership expenses shall be billed
directly to and paid by the Partnership reimbursements to the General Partner
of any of their Affiliates by the Partnership pursuant to this Section 9.4
shall be treated as "guaranteed payments" within the meaning of Section 707(c)
of the Code.
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14.1 WITHDRAWAL OF GENERAL PARTNERS.
(a) The Managing General Partner shall not withdraw from the
Partnership unless (i) the Managing General Partner shall have transferred all
of its Partnership Interest as a General Partner in accordance with Section
12.2; or (ii) such withdrawal shall have been approved by a Majority Vote of
the Limited Partners; provided, however, that if QSV withdraws or is removed as
the Managing General Partner, and in either case, elects to convert its
Partnership Interest for the Acquisition Price, as provided for in Section 9.1,
the REIT or an Affiliate of the REIT, as designated by the REIT shall
automatically succeed QSV and shall be admitted to the Partnership pursuant to
Section 13.3.
(b) Upon the occurrence of any one of the foregoing conditions, a
General Partner may withdraw from the Partnership' effective on at least thirty
(30) days' advance written notice to the Limited Partners, such withdrawal to
take effect on the date specified in such notice. The withdrawal of a General
Partner pursuant to this Section 14.1 also shall constitute the withdrawal of
such General Partner as a general partner of the Operating Partnership. The
General Partners shall have no liability to the Partnership or the Partners and
Assignees on account of any withdrawal in accordance with the terms of this
Section 14.1. If a General Partner shall give a notice of withdrawal pursuant
to this Section 14.1, then a Majority Vote of the Limited Partners, with the
separate written concurrence of any remaining General Partner, may elect a
successor General Partner. If no successor General Partner shall be elected in
accordance with this Section 14.1 and there shall be no remaining General
Partner, then the Partnership shall be dissolved pursuant to Article XV.
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APPENDIX D
MATERIAL AMENDMENTS
TO OPERATING PARTNERSHIP AGREEMENT
OTHER RESTAURANT PROPERTIES: Those certain properties for which food
sales account for 10% or more of the gross revenues generated by the
improvements on such properties and (a) properties (regardless of use)
acquired adjacent to such properties or acquired in conjunction with the use or
ownership of such properties, (b) properties that were formerly such type of
properties which are not currently being used for any purpose, and (c) any
unimproved land which is adjacent to such a property or on which such a
property is reasonably expected to be constructed within one (1) year following
the date of acquisition of such land, in any case in which the Partnership, the
REIT or any Affiliate or either of them has acquired or acquires an interest,
whether consisting of land to be held in fee simple or as a leasehold and any
improvements thereon (including all real property and certain personal
property associated therewith), together with (i) any other properties acquired
pursuant to Section 7.2(v) with respect to such properties, (ii) any properties
adjacent to such properties, (iii) any buildings, improvements, or other
structures situated on such properties, and (iv) any further right, title or
interest acquired in such properties. "Other Restaurant Property" means any
one of the Other Restaurant Properties.
RETAIL PROPERTIES: Those certain properties, other than Other Restaurant
Properties and Restricted Restaurant Properties, for which the sales of goods
or services to the public account for substantially all of the gross revenues
generated by the improvements on such properties and (a) properties (regardless
of use) acquired adjacent to such properties or acquired in conjunction with
the use or ownership of such properties, (b) properties that were formerly such
type of properties which are not currently being used for any purpose, and (c)
any unimproved land which is adjacent to such a property or on which such a
property is reasonably expected to be constructed within one (1) year following
the date of acquisition of such land, in any case in which the Partnership, the
REIT or any Affiliate of either of them has acquired or acquires an interest,
whether consisting of land to be held in fee simple or as a leasehold and any
improvements thereon (including all real property and certain personal property
associated therewith), together with (i) any other properties acquired pursuant
to Section 7.2(v) with respect to such properties, (ii) any properties adjacent
to such properties, (iii) any buildings, improvements or other structures
situated on such properties, and (iv) any further right, title or interest
acquired in such properties. "Retail Property" means any one of the Retail
Properties.
3.1. PURPOSES AND BUSINESS.
The purposes of the Partnership shall be (a) to invest in, acquire, own,
hold a leasehold interest in, manage, maintain, operate, lease, sublease,
improve, finance, reconstruct, sell, exchange, franchise and otherwise dispose
of Partnership Properties and Ancillary Property, whether itself, through other
Persons or otherwise; (b) to originate loans secured by liens on real estate;
and (c) to enter into any lawful transaction and engage in any lawful
activities in furtherance of the foregoing purposes; provided, however, that
such business arrangements and interests may be limited to and conducted in
such a manner so as to permit any REIT Partner at all times to be classified as
a real estate investment trust under the Code.
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3.2. POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to, or convenient for the
furtherance and accomplishment of the purposes and business described herein
and for the protection and benefit of the Partnership, including, without
limitation, the following:
* * *
(h) To originate loans secured by liens on real estate.
5.2. ADDITIONAL ISSUANCES OF PARTNERSHIP INTERESTS AND CAPITAL CONTRIBUTIONS.
(a) The Managing General Partner is hereby authorized to cause the
Partnership from time to time to issue to Partners (including the Managing
General Partner) or other persons (including, without limitation, in connection
with the contribution of property to the Partnership) additional Partnership
Interests in one or more classes, or one or more series of any of such
classes, with such designations, preferences and relative, participating,
optional or other special rights, powers and duties, including rights, powers
and duties senior to Limited Partner Partnership Interests, all as shall be
determined by the Managing General Partner in its sole and absolute discretion
subject to Delaware law, including, without limitation, (i) the allocations of
items of Partnership income, gain, loss, deduction and credit to each such
class or series of Partnership Interests; (ii) the right of each such class or
series of Partnership Interests to share in Partnership distributions; and
(iii) the rights of each such class or series of Partnership Interests upon
dissolution and liquidation of the Partnership; provided that no such
additional Partnership Interests shall be issued to the MLP or the REIT unless
either (A)(1) the additional Partnership Interests are issued in connection
with the grant, award or issuance of Units or shares of capital stock of the
REIT, which Units or shares have designations, preferences and other rights
such that the economic interests attributable to such Units or shares are
substantially similar to the designations, preferences and other rights of the
additional Partnership Interests issued to the MLP or the REIT in accordance
with this Section 5.4(a) and (2) the MLP or the REIT shall make a Capital
Contribution to the Partnership in an amount equal to the proceeds, if any,
raised in connection with the issuance of such Units or shares of capital
stock, or (B) the additional Partnership Interests are issued to all Partners
in proportion to their respective Percentage Interests (as defined in
Article VI).
(b) After the Effective Date, neither the MLP nor the REIT shall grant,
award or issue any additional Units or shares of capital stock, or rights,
options, warrants or convertible or exchangeable securities containing the
right to subscribe for or purchase such Units or shares of capital stock
(collectively "New Securities"), other than to all holders of such Units or
shares of capital stock unless (i) the Managing General Partner shall cause the
Partnership to issue to the MLP or the REIT Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of the Partnership
having designations, preferences and other rights, all such that the economic
interests are substantially the same as those of the New Securities, and (ii)
the MLP or the REIT makes a Capital Contribution to the Partnership of the
proceeds from the grant, award or issuance of such New Securities and from the
exercise of rights contained in such New Securities. Without limiting the
foregoing, the MLP and the REIT are expressly authorized to issue New
Securities for less than fair market value, and the Managing General Partner is
expressly authorized to cause the Partnership to issue to the MLP and the REIT
corresponding
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Partnership Interests, so long as (A) the Managing General Partner concludes
in good faith that such issuance is in the interests of the Managing General
Partner and the Partnership (for example, and not by way of limitation, the
issuance of shares of Common Stock and corresponding Partnership Units
pursuant to an employee stock purchase plan providing for employee purchases
of shares of Common Stock at a discount from fair market value or employee
stock options that have an exercise price that is less than the fair market
value of the Common Stock, either at the time of issuance or at the time of
exercise), and (B) the MLP and the REIT makes a Capital Contribution to the
Partnership of all proceeds from such issuance and exercise.
5.3. CONTRIBUTION OF PROCEEDS OF ISSUANCE OF COMMON STOCK.
In connection with the initial public offering of Common Stock by the REIT
and any other issuance of Common Stock or New Securities pursuant to Section
5.2, the REIT shall contribute to the Partnership any proceeds (or a portion
thereof) raised in connection with such issuance; provided that if the proceeds
actually received by the REIT are less than the gross proceeds of such issuance
as a result of any underwriter's discount or other expenses paid or incurred in
connection with such issuance, then the REIT shall be deemed to have made a
Capital Contribution to the Partnership in the amount equal to the sum of the
net proceeds of such issuance plus the amount of such underwriter's discount
and other expenses paid by the Company (which discount and expense shall be
treated as an expense for the benefit of the Partnership for purposes of
Section 9.4). In the case of employee purchases of New Securities at a
discount from fair market value, the amount of such discount representing
compensation to the employee, as determined by the Managing General Partner,
shall be treated as an expense of the issuance of such New Securities.
5.4. EXCHANGE OF UNITS.
(a) Subject to Section 5.4(b), on or after the date hereof, each Limited
Partner (other than the REIT) shall have the right (the "Exchange Right") to
require the REIT to acquire all or a portion of the Partnership Units held by
such Limited Partner in exchange for the REIT Stock Amount. The Exchange Right
shall be exercised pursuant to a Notice of Exchange delivered to the REIT (with
a copy to the Partnership) by the Limited Partner who is exercising the
Exchange Right (the "Exchanging Partner"). A Limited Partner may not exercise
the Exchange Right for fewer than one thousand (1,000) Partnership Units or, if
such Limited Partner holds fewer than one thousand (1,000) Partnership Units,
all of the Partnership Units held by such Partner. The Exchanging Partner
shall have no right, with respect to any Partnership Units so exchanged, to
receive any distributions paid with respect to the Partnership Units on or
after the date of the Notice of Exchange. The Assignee of any Limited Partner
may exercise the rights of such Limited Partner pursuant to this Section
5.4(a), and such Limited Partner shall be deemed to have assigned such rights
to such Assignee and shall be bound by the exercise of such rights by such
Assignee. In connection with any exercise of such rights by an Assignee on
behalf of a Limited Partner, the REIT Stock Amount shall be paid by the REIT
directly to such Assignee and not to such Limited Partner.
(b) Notwithstanding the provisions of Section 5.4(a), a Partner shall not
be entitled to exercise the Exchange Right pursuant to Section 5.4(a) if the
delivery of shares of Common Stock to such Partner by the REIT pursuant to
Section 5.4(a) would be prohibited under the Amended Articles of Incorporation
of the REIT.
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7.2. POWERS OF MANAGING GENERAL PARTNER.
Subject to the limitation of Section 7.3, which vests certain approval
rights in the Limited Partners, and to the limitations and restrictions set
forth in Article VIII, the Managing General Partner (acting on behalf of the
Partnership) shall have the right, power, and authority, in the management of
the business and affairs of the Partnership, to do or cause to be done any and
all acts, at the expense of the Partnership, deemed by the Managing General
Partner to be necessary or appropriate to effectuate the business, purposes,
and objectives of the Partnership. The power and authority of the Managing
General Partner pursuant to this Agreement shall be liberally construed to
encompass all acts and activities in which a partnership may engage under the
Delaware RULPA. The power and authority of the Managing General Partner shall
include, without limitation, the power and authority on behalf of the
Partnership:
* * *
(l) To originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnership's underwriting criteria, which shall be
established by the Managing General Partner.
9.1. COMPENSATION TO GENERAL PARTNERS.
Except as expressly provided in Section 9.3 or 9.4, no General Partner
shall receive any compensation from the Partnership for services rendered in
its capacity as a general partner of the Partnership or the MLP.
Notwithstanding anything herein to the contrary, at such time as QSV ceases to
be the Managing General Partner or the managing general partner of the MLP,
whether as a result of the transfer of QSV's Partnership Interest pursuant to
Section 11.2 (or Section 12.2 of the Investors Partnership Agreement) or the
withdrawal or removal of QSV pursuant to Section 13.1 (or Section 14.1 or 14.2
of the Investors Partnership Agreement) (other than removal for "cause," as
defined in the Investors Partnership Agreement), then QSV shall have the
option, in its sole discretion, to convert its Partnership Interest and its
partnership interest in the MLP and to either assign to the MLP or convert its
rights (the "Rights") under the provisions of Section 9.3 (and Section 9.3 of
the Investors Partnership Agreement) (collectively, the "Conversion") for the
Acquisition Price (as defined below), effective as of the date of such
transfer, withdrawal or removal, and upon such Conversion the successor
Managing General Partner shall cause the Partnership to issue to QSV
Partnership Units in the amounts provided for below.
In exchange for the Conversion of the Rights, as provided for above, and
the conversion of the QSV's Partnership Interest, in the event QSV elects to
effect the Conversion, QSV will receive the "Acquisition Price," consisting of
(a) the Initial Unit Consideration and (b) the Contingent Unit Consideration.
The Initial Unit Consideration consists of 850,000 Partnership Units (which
number or classification shall be adjusted to give effect to any
reclassification or change of the shares of Common Stock or Units, including,
without limitation, a split, or any merger or consolidation of the REIT or the
MLP, except the merger of the MLP with the REIT or a subsidiary thereof, or
sale of assets to another entity, occurring after March 31, 1997), with the
number of Partnership Units issuable hereunder being reduced (on a one-for-one
basis) by the number of Units or shares of Common Stock otherwise received by
QSV in connection with the Conversion. The portion of the Initial Unit
Consideration consisting of Partnership Units
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shall be issued by the Partnership as soon as practicable following the date
of the Conversion, but in no event later than 30 days thereafter.
The Contingent Share Consideration consists of up to a maximum number of
550,000 Partnership Units (which number or classification shall be adjusted to
give effect to any reclassification or change of the Common Stock or Units,
including, without limitation, a split, or any merger or consolidation of the
REIT or the MLP, except the merger of the MLP with the REIT or any subsidiary
thereof, or sale of assets to another entity, occurring after March 31, 1997).
The type and number of securities issuable as the Contingent Share
Consideration (subject to the next sentence) shall be at the sole discretion of
QSV. The exact number of Partnership Units to be issued (which number shall be
reduced on a one-for-one basis by the number of Units otherwise received by QSV
as part of the Contingent Share Consideration) will be determined by dividing
the (i) amount by which the MGP Net Income (as defined below) for the 2000
Fiscal Year exceeds $3,612,500 by (ii) $4.25, and rounding the resulting number
up to the nearest whole number. "MGP Net Income" means the dollar amount of
fees and distributions which would have been payable to QSV, as Managing
General Partner, by the Partnership for the 2000 Fiscal Year, pursuant to the
provisions of Section 9.3, had QSV operated the Partnership on a continuous
basis from the date of the Conversion through December 31, 2000 plus the
amounts that would have been payable to QSV pursuant to its aggregate 1.98%
general partnership interests in the Partnership and the MLP, less $775,000.
For example, if the MGP Net Income for the 2000 Fiscal Year would have
been $5,100,000 ($5,875,000 revenues less $775,000) then the Contingent Unit
Consideration would be an additional 350,000 Partnership Units.
The Contingent Unit Consideration, if any, shall be issued by the
Partnership as soon as practicable following the end of the 2000 Fiscal Year,
but in no event later than March 31, 2001.
9.3. OPERATIONAL EXPENSES.
In addition to any reimbursement pursuant to the indemnification set forth
in Section 7.10, the Partnership, pursuant to this Section 9.3 and Section 9.3
of the Investors Partnership Agreement, shall:
(a) With respect to (i) the Partnership Properties held as of March 17,
1995 and (ii) the Partnership Properties and Ancillary Property related
thereto acquired thereafter with respect to the Partnership Properties referred
to in clause (i) above whether pursuant to Section 8.12 or otherwise, the
Partnership shall cause to be paid to the Managing General Partner with
respect to each Fiscal Year an aggregate amount equal to Four Hundred Thousand
Dollars ($400,000) adjusted annually as set forth in Section 9.3(c), which
amount shall be in lieu of any reimbursement for expenses related to the
management of the business affairs of the Partnership and the Limited Partner
(other than expenses described in Section 9.3(c)) that are incurred by the
Managing General Partner or its Affiliates with respect to such Partnership
Properties, which amount shall be payable in equal quarterly installments
within sixty (60) days after the end of each fiscal quarter.
(b) With respect to any Partnership Property and Ancillary Property
related thereto acquired after March 17, 1995 (other than those referred to in
Section 9.3(a)) and mortgage loans, if any, originated by the Partnership or
the MLP, (i) the Partnership shall pay to the
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Managing General Partner (A) an acquisition fee equal to 1% of the purchase
price paid by the Partnership or the Limited Partner for such Partnership
Property and Ancillary Property related thereto, payable on the date of
acquisition or origination, as applicable, and (B) with respect to each
Fiscal Year, an amount, adjusted annually as set forth in Section 9.3(c),
accruing while such property is held at the rate of 1% per annum (applied
using the simple interest method on the basis of a 365/366-day year and the
actual number of days elapsed) on the purchase price paid by the Partnership
or any of the Limited Partners for such Partnership Property and Ancillary
Property related thereto, and (ii) if the Rate of Return attributable to all
Partnership Properties and Ancillary Property related thereto acquired after
March 17, 1995 (other than those referred to in Section 9.3(a)) in respect of
any Fiscal Year shall exceed 12% per annum, the Partnership shall pay to the
Managing General Partner an amount equal to 25% of the amount of cash
received by the Partnership representing such excess, which amounts shall be
in lieu of any reimbursement of expenses related to the management of the
business affairs of the Partnership and the Limited Partners (other than
expenses described in Section 9.3(c)) that are incurred by the Managing
General Partner or its Affiliates with respect to such Partnership Properties
and (except as provided in clause (i)(A) of this Section 9.3(b)) shall be
payable in quarterly installments within sixty (60) days after the end of
each fiscal quarter (which may be estimated in the case of the first three
fiscal quarters); provided that there shall be credited against the amounts,
if any, payable pursuant to clause (ii) of this Section 9.3(b) in respect of
any Fiscal Year amounts payable to the Managing General Partner in respect of
its First-Tier Residual Interest or Second-Tier Residual Interest pursuant to
Sections 6.5 and 6.6 of the Investors Partnership Agreement in respect of
such Fiscal Year. For purposes of the calculations provided for in this
Section 9.3 in the event of a mortgage loan origination, the term
"Partnership Properties" shall be deemed to include any originated mortgage
loans and the "purchase price" of such mortgage loans will be the principal
balances thereof at the beginning of any Fiscal Year.
(c) The Partnership shall either pay, or reimburse the Managing General
Partner on a monthly basis for the payment of, all amounts payable to any
Person for providing goods or performing services (including, without
limitation, legal, accounting, auditing, recordkeeping, reporting,
depositary, transfer agent, printing, appraisal, servicing and consulting
services) for or on behalf of the Partnership or the Limited Partners;
provided, however, that the Partnership shall not pay, or reimburse the
Managing General Partner for, the payment of any amount to an Affiliate or an
officer, director, or employee of an Affiliate for legal, accounting,
managerial, or consulting services; and provided further, that the
Partnership shall pay, or shall reimburse the Managing General Partner for, a
payment to an Affiliate or an officer, director, or employee of an Affiliate
for goods or other services only if the price and the terms upon which such
goods or services are provided to the Partnership or the Limited Partners are
fair to the Partnership or the Limited Partners, as the case may be, and are
not less favorable to the Partnership or the Limited Partners, as the case
may be, than would be incurred if the Partnership or the Limited Partners
were to obtain such goods or services from an unrelated third party or were
to engage employees to provide such goods or services directly.
For 1987 and for each Fiscal Year thereafter, the amount payable
pursuant to Section 9.3(a) shall be increased by an amount equal to the
product of Four Hundred Thousand Dollars ($400,000) multiplied by the
percentage increase in the Price Index from January 1, 1986, through the last
day of the immediately preceding Fiscal Year. For each year after the year
in which a Partnership Property is acquired, the amount otherwise payable
pursuant to Section 9.3(b)(i)(B) (the "Section 9.3(b)(i)(B) Amount") shall
be increased by an amount equal to the product of the Section 9.3(b)(i)(B)
Amount multiplied by the percentage increase in the Price
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Index from the first day of the immediately preceding Fiscal Year or, in the
case of the first year after the year in which the Partnership Property is
acquired, the first day of the month in which the acquisition occurred
through the last day of the Fiscal Year immediately preceding such year or,
if earlier, the last day of the month in which such Partnership Property was
disposed of. The percentage increase in the Price Index through the last day
of a particular period shall be determined by calculating the increase, if
any, in the Price Index for the last time period during such period (the
"Price Index Determination Period") with respect to which the Price Index is
published (currently a monthly period) over the Price Index for the time
period immediately preceding the first day of the Price Index Determination
Period, and expressing the amount of such increase as a percentage of the
Price Index for said time period immediately preceding the first day of the
Price Index Determination Period.
"RATE OF RETURN" in respect of any period shall mean and refer to the
quotient obtained by dividing (1) the aggregate revenues (calculated in
accordance with generally accepted accounting principles and before
amortization of unearned income on direct financing leases) received by the
Partnership or the Limited Partners from the Partnership Properties and
Ancillary Property referred to in Section 9.3(b) for such period, whether
through operations, sale or other disposition, less (without duplication) (i)
the aggregate fees payable pursuant to Section 9.3(b)(i)(B) for such period in
respect of such properties, (ii) the aggregate expenses of the Partnership
(other than interest expense, depreciation, amortization and other non-cash
expenses and charges, and expenses described in Sections 9.3(b) and (c))
directly attributable to such property and interest expense on any debt or
distributions with respect to any interests (the "Preferred Interests") of the
Partnership issued to the REIT in exchange for the proceeds from the issuance
by the REIT of equity securities ranking senior to the Common Stock with
respect to the payment of dividends by the REIT allocated thereto for such
period, (iii) the general and administrative expenses of the Partnership (other
than non-cash expenses and charges and expenses described in Sections 9.3(a)
and (b)) for such period allocated to such properties (based on the ratio of
Average Partnership Equity in such properties to the aggregate Average
Partnership Equity in all Partnership Properties), and (iv) the principal
amount of debt and dollar amount of Preferred Interests allocated to any such
property properties repaid during such period and, if applicable, the cash
costs and expenses of any kind or nature incurred in respect of the sale or
other disposition thereof, by (2) the Average Partnership Equity in such
properties during such period. "AVERAGE PARTNERSHIP EQUITY" shall mean and
refer to (A) the average of the sums of the aggregate purchase prices therefor,
the aggregate fees paid pursuant to (b)(i)(A) above Section 9.3(b)(i)(A) in
respect thereof and all other cash costs and expenses of any kind or nature
incurred in connection with the acquisitions thereof ("Property Costs") as of
the last day of each calendar month occurring during the period of
determination, less (B) the average outstanding principal amount of debt of
the Partnership and the aggregate dollar value of the Preferred Interests
outstanding as of the last day of each calendar month during such period and
allocated to such properties. The Rate of Return for any outstanding mortgage
loans will be evaluated separately with the mortgage loans constituting a
separate pool of "properties" for such calculation. The general and
administrative expenses allocable to such mortgage loans shall be equal to the
total amount of such expenses for any Fiscal Year multiplied by a fraction, the
numerator of which shall be the aggregate principal amount of all mortgage
loans outstanding at the beginning of such Fiscal Year and the denominator of
which shall be the total of all Property Costs and such aggregate principal
amount.
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For the purposes of the foregoing, debt of the Partnership and the
Preferred Interests shall be allocated among the Partnership Properties as
follows: (1) non-recourse debt shall be allocated to the property secured
thereby and, if such debt is secured by more than one property, such debt shall
be allocated among the properties secured thereby based on the relative
Property Costs thereof; and (2) recourse debt and the Preferred Interests shall
be allocated to all of the Partnership Properties based on the relative
Property Costs thereof (reduced for this purpose by the amounts of non-recourse
debt allocated thereto in accordance with clause (1) above).
9.4. REIMBURSEMENT OF THE GENERAL PARTNERS.
In the event that the provisions of Section 9.3 are terminated in
accordance with the terms of Section 9.1, the following compensation provisions
shall apply, to be effective upon the date of such termination.
(a) The General Partners shall not be compensated for their services as
general partner of the Partnership except as provided in elsewhere in this
Agreement (including the provisions of Article VI regarding distributions,
payments and allocations to which it may be entitled in its capacity as the
General Partner).
(b) Subject to Sections 9.4(c) and 16.9, the Partnership shall be liable
for, and shall reimburse the General Partners on a monthly basis, or such other
basis as the General Partners may determine in their sole and absolute
discretion, for all sums expended in connection with the Partnership's business
or for the benefit of the Partnership, including, without limitation,
(i) expenses relating to the ownership of interests in, and management and
operation of, or for the benefit of, the Partnership, (ii) compensation of
officers and employees, including, without limitation, payments under future
employee benefit plans of any General Partner, (iii) director fees and
expenses, and (iv) all costs and expenses of any General Partner being a public
company, including costs of filings with the Commission, reports and other
distributions to its stockholders.
(c) To the extent practicable, Partnership expenses shall be billed
directly to and paid by the Partnership, subject to Section 16.9,
reimbursements to the General Partner of any of their Affiliates by the
Partnership pursuant to this Section 9.4 shall be treated as "guaranteed
payments" within the meaning of Section 707(c) of the Code.
13.1. WITHDRAWAL OR REMOVAL OF GENERAL PARTNERS.
A General Partner may withdraw from the Partnership or be removed as a
General Partner without withdrawing as, or being removed as, a general partner
of the MLP. A General Partner shall withdraw from the Partnership or be
removed as a General Partner if the General Partner withdraws as, or is removed
as, a general partner of the MLP. Such withdrawal or removal shall be
effective at the time the Departing General Partner notifies the other General
Partners of such withdrawal or the Departing General Partner is notified by the
Partnership of such removal or at the same time as is the General Partner's
withdrawal or removal as a general partner of the MLP, as applicable. Except
as provided below, the Managing General Partner shall not withdraw from the
Partnership unless (i) the Managing General Partner shall have transferred all
of its Partnership Interest as a General Partner in accordance with Section
11.2; or (ii) such withdrawal shall have been approved by a Majority Vote of
the Limited Partners. In the event QSV withdraws or is removed as a General
Partner or as a general partner of the MLP, and, in either
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case, elects to convert its Partnership Interest for the Acquisition Price as
provided in Section 9.1, the REIT or an Affiliate of the REIT, as designated
by the REIT, shall automatically succeed the Departing Managing General
Partner, provided that if the REIT or any Affiliate thereof shall decline to
serve as a successor General Partner then a successor General Partner shall
be selected upon the affirmative vote of all Limited Partners. If no such
successor General Partner is selected by the Limited Partners and the
Partnership has no remaining General Partner, then the Partnership shall be
dissolved pursuant to Section 14.2.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation, as amended or supplemented
(the "Articles of Incorporation"), provide certain limitations on the
liability of the Registrant's directors and officers for monetary damages to
the Registrant. The Articles of Incorporation obligate the Registrant to
indemnify its directors and officers, and permit the Registrant to indemnify
its employees and other agents, against certain liabilities incurred in
connection with their service in such capacities. These provisions could
reduce the legal remedies available to the Registrant and the stockholders
against these individuals. See "Certain Provisions of Maryland Law and of
the REIT Corporation's Articles and Bylaws--Limitation of Liability and
Indemnification."
The Registrant's Articles of Incorporation require it to indemnify (a)
the Registrant's directors and officers (whether serving the Registrant or,
at its request, any other entity) who have been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by
reason of his service in that capacity, against reasonable expenses incurred
by him in connection with the proceeding unless it is established that (i)
his act or omission was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) he actually received an improper personal benefit in money,
property or services or (iii) in the case of a criminal proceeding, he had
reasonable cause to believe that his act or omission was unlawful and (b)
other employees and agents of the Registrant to such extent as shall be
authorized by the Board of Directors or the Registrant's Bylaws and be
permitted by law. In addition, the Registrant's Articles of Incorporation
require the Registrant to pay or reimburse, in advance of the final
disposition of a proceeding, reasonable expenses incurred by a director or
officer who is a party to a proceeding under procedures provided for under
the Maryland General Corporation Law (the "MGCL"). The Registrant's Bylaws
also permit the Registrant to provide such other and further indemnification
or payment or reimbursement of expenses as the Board of Directors deems to be
in the interest of the Registrant and as may be permitted by the MGCL for
directors, officers and employees of Maryland corporations.
The Registrant has entered into indemnification agreements with each of
the Registrant's officers and directors. The indemnification agreements
require, among other things, that the Registrant indemnify its officers and
directors to the fullest extent permitted by law and advance to the officers
and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. The
Registrant must also indemnify and advance all expenses incurred by officers
and directors seeking to enforce their rights under the indemnification
agreements and cover officers and directors under the Registrant's directors'
and officers' liability insurance. Although the indemnification agreements
offer substantially the same scope of coverage afforded by law, such
agreements provide assurance to directors and officers that indemnification
will be available because such contracts cannot be modified unilaterally in
the future by the Board of Directors or the stockholders to eliminate the
rights they provide.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
EXHIBIT
NO. EXHIBIT
------- -------
2.1 Merger Agreement-Included as APPENDIX A to the
Prospectus/Proxy constituting a portion of the
Registration Statement
3.1* Amended Articles of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
5.1* Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the Common Stock
8.1** Opinion of Winstead Sechrest & Minick P.C. regarding
tax matters
10.1* Third Amended and Restated Agreement of Limited
Partnership of U.S. Restaurant Properties Master L.P.
("USRP")
10.2* Third Amended and Restated Agreement of Limited
Partnership of U.S. Restaurant Properties Operating L.P.
(the "Operating Partnership")
10.3* Withdrawal Agreement dated _________________, 1997 by and
among the Registrant, USRP, the Operating Partnership,
Robert J. Stetson and Fred H. Margolin
10.4* Employment Agreement dated ___________________, 1997 by
and between the Registrant and Robert J. Stetson
10.5* Employment Agreement dated _________________, 1997 by and
between the Registrant and Fred H. Margolin
23.1** Consent of Deloitte & Touche LLP
23.2* Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1)
99.1* Form of Proxy Card
- -------------------
*Previously filed.
**Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because the required information is included in
the Consolidated Financial Statements or the Notes thereto or is otherwise
inapplicable.
(c) REPORTS, OPINIONS OR APPRAISALS.
Opinion of Morgan Keegan & Company, Inc. - Included as APPENDIX B to the
Prospectus/Proxy Statement constituting a portion of the Registration
Statement.
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ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by
the Registrant pursuant to Section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration
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statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by Form S-4 with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of Form S-4.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(9) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it
became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of this Amendment No. 3 to Form S-4 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Dallas, State of Texas, on the 2nd
day of May, 1997.
U.S. RESTAURANT PROPERTIES, INC.
By: /s/ ROBERT J. STETSON
-----------------------------------
Name: Robert J. Stetson
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert J. Stetson President and Chief Executive May 2, 1997
- ------------------------- Officer and Director
Robert J. Stetson (Principal Executive Officer
and Principal Financial Officer)
/s/ Fred H. Margolin Chairman of the Board of May 2, 1997
- ------------------------- Directors, Secretary
Fred H. Margolin and Treasurer
II-5
<PAGE>
EXHIBIT 8.1
WINSTEAD SECHREST & MINICK P.C.
5400 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
Direct Dial: (214) 745-5342
[email protected]
April 28, 1997
U.S. Restaurant Properties, Inc.
5310 Harvest Hill Road
Suite 270, L.B. 168
Dallas, Texas 75230
Ladies and Gentlemen:
We have acted as counsel to U.S. Restaurant Properties, Inc. (the
"Company") in connection with the Registration Statement on Form S-4 (No.
333-21403), initially filed with the Securities and Exchange Commission on
February 7, 1997, as amended (the "Registration Statement"). This opinion
relates (i) to the Company's qualification for federal income tax purposes as
a real estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), for taxable years
beginning with the taxable year ending December 31, 1997 and (ii) to the
accuracy of the information contained in the "Federal Income Tax
Considerations" section of the Registration Statement to the extent it
constitutes matters of law or legal conclusions. Capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the
Registration Statement.
For the purpose of rendering our opinion, we have examined and are
relying upon the truth, accuracy and completeness, at all relevant times, of
the statements and representations contained in the following documents:
Item 1. The Amended Articles of Incorporation and the Bylaws of the
Company;
Item 2. The Registration Statement;
Item 3. Representations made to us by the Company through Robert J.
Stetson, Chief Executive Officer and President, and Fred H. Margolin,
Chairman of the Board and Treasurer, of the Company and the Managing General
Partner, in those certain Certificates to Counsel (the "Certificates") dated
of even date herewith and delivered to us in connection with the Registration
Statement and this letter.
In connection with rendering this opinion, we have assumed to be true
and are relying upon, without any independent investigation or review
thereof, the following:
1. The authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as copies,
and authenticity of the originals of such documents.
<PAGE>
U.S. Restaurant Properties, Inc.
April 28, 1997
Page 2
2. The genuineness of all signatures, the due authorization, execution
and delivery of all documents by all parties thereto and the due authority of
all persons executing such documents.
3. The Company will file a proper election to be taxed as a REIT with
its timely filed federal income tax return for the taxable year ending
December 31, 1997, and that the Company will not cause such election to be
terminated or revoked.
4. The beneficial ownership of the Company will be held by 100 or more
persons for at least 335 days during the 1998 tax year and each tax year
thereafter.
5. The Operating Partnership will be operated in accordance with
applicable state partnership statutes, the Operating Partnership Agreement
and the statements and representations made in the Registration Statement.
6. For each taxable year, less than 10% of the Operating Partnership's
and USRP's gross income will be derived from sources other than (i) real
property rental income and gain from sale or other disposition of real
property, as required by Section 7704(d) of the Code, or (ii) other items of
"qualifying income" within the meaning of Section 7704(d) of the Code.
Based on our examination of the foregoing items, subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of opinion that:
(i) Commencing with the Company's taxable year ending December 31, 1997,
the Company will be organized in conformity with the requirements for
qualification as a REIT under the Code and the proposed method of
operation described in the Proxy Statement/Prospectus included in the
Registration Statement will enable the Company to satisfy the
requirements for such qualification under the Code for its taxable
year ending December 31, 1997 and for subsequent taxable years.
(ii) (a) The discussion in the Proxy Statement/Prospectus included in the
Registration Statement under the caption "Federal Income Tax
Considerations" fairly summarizes the federal income tax
considerations that are likely to be material to holders of common
stock who are United States citizens or residents or domestic
corporations and who are not subject to special treatment under the
tax laws and (b) we confirm our opinion set forth under the caption
"Federal Income Tax Considerations."
(iii) The discussion in the Proxy Statement/Prospectus included in the
Registration Statement under the caption "ERISA Considerations"
is correct in all material respects.
(iv) Immediately after consummation of the Exchange Alternative, the
Operating Partnership and USRP will be treated as partnerships for
federal income tax purposes.
In addition to the assumptions set forth above, this opinion is subject
to the following exceptions, limitations and qualifications:
1. Our opinions expressed herein are based upon interpretation of the
current provisions of the Code and existing judicial decisions,
administrative regulations and published rulings and procedures. Our
opinions are not binding upon the Internal Revenue Service or courts and
there is no assurance that the Internal Revenue Service will not successfully
challenge the conclusions set forth herein. The Internal Revenue Service has
not yet issued regulations or administrative interpretations with respect to
various provisions of the Code relating to REIT
<PAGE>
U.S. Restaurant Properties, Inc.
April 28, 1997
Page 3
qualification. Consequently, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. We undertake no obligation to advise you of changes in law
which may occur after the date hereof.
2. Our opinions are limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to any
other matter not specifically set forth in the foregoing opinion.
3. Our opinions are limited in all respects to the federal law of the
United States and the laws of the State of Texas, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.
4. (a) The Company's qualification and taxation as a real estate
investment trust depend upon the Company's ability to satisfy, through
actual operating results, the applicable asset composition, source of
income, stockholder diversification, distribution, record keeping and
other requirements of the Code necessary to qualify and be taxed as a
REIT.
(b) The Operating Partnership's and USRP's qualification and
taxation as a partnership depend upon the Operating Partnership's and
USRP's ability to satisfy, through actual operating results, source of
income and other requirements of the Code necessary to qualify and be
taxed as a partnership.
The foregoing opinions are based upon the proposed method of operation as
described in the Registration Statement and facts stated in the Certificates
and other documents described herein. We undertake no obligation to review
at any time in the future whether the Company or the Operating Partnership or
USRP has fulfilled the requirements listed in this paragraph 4 and,
consequently, no assurance can be given that the actual results of the
Company's or the Operating Partnership's or USRP's operations for any taxable
year will satisfy the requirements of the Code necessary to qualify or be
taxed as a REIT or a partnership, as applicable.
5. In the event any one of the statements, representations, warranties
or assumptions we have relied upon to issue this opinion is incorrect in a
material respect, our opinions might be adversely affected and may not be
relied upon.
We hereby consent to the reference to us under the caption "Federal
Income Tax Considerations" in the Registration Statement, and to the filing
of this opinion as an Exhibit to the Registration Statement, without implying
or admitting that we are experts within the meaning of the Securities Act of
1933, as amended, with respect to any part of the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Thomas R. Helfand
------------------------
Thomas R. Helfand
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of U.S. Restaurant
Properties, Inc. on Form S-4 of our report dated February 28, 1997, appearing
in and incorporated by reference in this Registration Statement, related to
U.S. Restaurant Properties Master L.P. and to the use in this Registration
Statement of our report dated February 4, 1997 related to U.S. Restaurant
Properties, Inc. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 2, 1997
